RULES on Foreign Exchange Balance Article 1 Scope These Rules apply to credit institutions that have been granted operating licences in accordance with Article 4, Paragraph 1, Subparagraphs 1-4 of the Act on Financial Undertakings, no 161/2002, with subsequent amendments; cf. Article 4, Paragraph 2 of the same Act, hereinafter referred to as financial undertakings. Article 2 Definitions Capital base: The capital base is calculated as is set forth in Article 84 of the Act on Financial Undertakings, no. 161/2002, with subsequent amendments. The calculation shall be based on the undertaking s capital base according to its last financial statements. Financial undertakings are authorised to adjust the capital base at the end of the month to reflect exchange rate movements, provided that the Central Bank is explicitly notified of such changes. If this authorisation has been used, a corresponding adjustment upwards or downwards shall be made at the end of each month. Assets and liabilities in foreign currency: Assets, liabilities, and off-balance sheet items in foreign currency, as well as domestic-currency items that are based on foreign currency exchange rates. Forward position: All transactions in foreign currency that are settled after three or more business days, including currency swaps and other swap agreements. Total foreign exchange balance: The sum of a financial undertaking s positive open foreign exchange positions (net long position) less the sum of its negative open foreign exchange positions (net short position). Current position in a foreign currency: Assets and liabilities in the currency in question, including current transactions to be settled within three business days. Open foreign exchange position in individual currencies: All assets, liabilities, and off-balance sheet items in the currency in question in which the financial undertaking itself bears exchange rate risk. The definition of risk shall be based on the Act on Financial Undertakings, no 161/2002, as appropriate. Article 3 Itemisation of assets and liabilities in foreign currency Financial undertakings are required to itemise their current assets in the following 1. Deposits with the Central Bank of Iceland. 2. Central Bank of Iceland certificates of deposit. 3. Nostro accounts. 4. Other deposits and interest-bearing agreements.
5. Listed bonds and bills issued by a state, central bank, international institution, or international development bank, or securities bearing a guarantee from these entities; cf. Articles 11 and 14 of the Financial Supervisory Authority s Rules on the Capital Requirement and Risk-Weighted Assets of Financial Undertakings, no. 215 of 2 March 2007. 6. Other listed bonds and bills. 7. Listed equities. 8. Unlisted equities. 9. Shares in mutual funds. 10. Short-term loans for periods under one year. 11. Long-term loans for periods over one year. 12. Current transactions with a settlement date within three business days. 13. Assets other than those specified above. Financial undertakings are required to itemise their current liabilities in the following 1. Transactions with the Central Bank of Iceland according to the Bank s current Rules on Central Bank Facilities for Financial Undertakings, excluding forward transactions. 2. Liabilities towards Central Bank of Iceland other than those specified in Subparagraph 1. 3. Collateralised loans and repurchase agreements with parties other than the Central Bank of Iceland. 4. Issued bills. 5. Issued bonds maturing within one year. 6. Issued bonds maturing in more than one year. 7. Covered bonds issued according to the Act on Covered Bonds, no. 11/2008. 8. Syndicated loans. 9. Bilateral loan agreements with financial undertakings. 10. Interest-bearing agreements and deposits from financial undertakings. 11. Interest-bearing agreements and deposits from pension funds, mutual funds, and investment funds. 12. General deposits. 13. Current transactions with a settlement date within three business days. 14. Liabilities other than those specified above. Financial undertakings are required to itemise their forward assets in the following
Forward foreign currency agreements. 1. Forward foreign currency swap agreements. 2. Cross-currency interest rate swaps. 3. Options. 4. Other assets creating a forward position. Financial undertakings are required to itemise their forward liabilities in the following 1. Forward foreign currency agreements. 2. Forward foreign currency swap agreements. 3. Cross-currency interest rate swaps. 4. Options. 5. Other liabilities creating a forward position. Article 4 Calculation of open foreign exchange position The calculation of the open foreign exchange position shall include the following items: 1. All assets in foreign currency less liabilities in foreign currency, but including accrued interest not yet due and payable (net current position). 2. The position of forward contracts, futures, and currency swaps, insofar as these agreements are not included in the net current position (net forward position). Currency swap agreements and forward contracts shall be treated as an asset in one currency and as a liability in the other. 3. Irrevocable guarantees in foreign currency and similar instruments that are certain to be called and unlikely to be reclaimable. 4. Total net delta value of currency options. Financial undertakings trading in options shall calculate the delta value in accordance with the provisions of the Financial Supervisory Authority's Rules on the Capital Requirement and Risk-Weighted Assets of Financial Undertakings, no. 215/2007. 5. The market value of derivatives contracts in foreign currency other than those specified in Subparagraphs 2 and 4 above. In calculating the open position in individual currencies, basketed currency units must be broken down according to the weight of each component currency. In calculating the open foreign exchange position, amounts shall be converted using the central exchange rate (mid-rate) of the Icelandic króna as it is published on the Central Bank of Iceland website at the end of each month. Market makers in the foreign exchange market are authorised, however, to use the closing exchange rate published by the institution concerned at the end of each month.
Article 5 Foreign exchange balance The foreign exchange balance to which these Rules apply shall always remain within the following limits: 1. An open position in individual foreign currencies may be neither positive nor negative by more than the equivalent of 15% of the undertaking s capital base according to its most recent financial statements; cf., however, Article 2, Paragraph 1. 2. The total foreign exchange balance may be neither positive nor negative by more than the equivalent of 15% of the undertaking s capital base according to its most recent financial statements; cf., however, Article 2, Paragraph 1. Should the foreign exchange balance deviate from the limits set forth in these Rules, the financial undertaking concerned must take action so as to eliminate the difference within a maximum of three business days. If a financial undertaking s measures fail to achieve this, the Central Bank may calculate periodic penalties in accordance with Article 2, Paragraph 1 of the Rules on the Imposition of Periodic Penalty Payments, no. 389 of 29 May 2002, to be levied on the amount by which the balance exceeds the stipulated limit. Article 6 Exemptions The Central Bank may authorise a financial undertaking to maintain a separate positive foreign exchange balance, apart from the general foreign exchange balance provided for in Article 5, for the purpose of hedging against the impact of changes in the exchange rate of the króna on its capital adequacy ratio, provided that the undertaking concerned submits a report stating the premises and calculations used to determine the size of the separate positive foreign exchange balance and that it gives regular account of it in its reports to the Central Bank. Article 7 Reporting Parties to whom these Rules apply shall submit to the Central Bank a monthly report on their foreign exchange balance as is specified in Article 3, cf. Article 4, within 15 days of each month-end. The Central Bank of Iceland may demand more frequent reports than is specified here. At any time, the Central Bank may also request more detailed information on the itemisation of assets and liabilities in accordance with Article 3. Market makers in the interbank foreign exchange market shall also submit daily reports on their foreign exchange balance. The report shall specify only the total current position of assets and liabilities, on the one hand, and the forward position of assets and liabilities, on the other. If a financial undertaking neglects to submit this information to the Central Bank at the time specified in these Rules, the Bank may impose periodic penalties on the financial undertaking concerned, according to the Rules on the Imposition of Periodic Penalty Payments, currently no. 389 of 29 May 2002.
Article 8 Entry into force These Rules are set in accordance with the authority contained in Article 13 of the Act on the Central Bank of Iceland, no. 36/2001, and Article 8 of the Foreign Exchange Act, no. 87/1992, and shall enter into force on 1 January 2011. At that time, the Rules on Foreign Exchange Balance, no. 707 of 14 August 2009, shall be abrogated. Temporary provisions I. Because of circumstances developing in the wake of the collapse of the Icelandic banking system, the Central Bank of Iceland may authorise financial undertakings to hold a separate positive or negative foreign exchange balance temporarily, if necessary. A financial undertaking shall base its application for such an authorisation on a dated schedule specifying how it intends to achieve a foreign exchange balance in compliance with these Rules, including a thorough description of the actions it intends to take. Exemptions in accordance with this provision shall not be granted for a period extending beyond 1 January 2013. This temporary provision shall expire on 1 January 2013. Reykjavík, 6 December 2010 Central Bank of Iceland Már Guðmundsson Governor Tryggvi Pálsson Director