A fisheries management system is only as good as its ability to conform to biologically appropriate catch limits that lead to sustainable exploitation of stocks. However, implementation of single-species catch limits in multi-species fisheries remains problematic when individual species quotas become limiting, and can therefore preclude advancement toward the holistic approach of ecosystem-based management. By adding flexibility to regulations controlling how quotas may be used by fishermen, the constraints of single species quotas may be alleviated, potentially yielding greater short-term profits. However, this greater flexibility may be detrimental in the long term if it simultaneously allows for greater risk in stock depletion due to persistent surpassing of catch limits. This study uses a bioeconomic model to analyze how catch-quota balancing mechanisms currently implemented in Iceland affect long-term sustainability of individual species and profitability of the fishery as a whole. We focus on the mechanism that allows species transformations of quota whereby quota for one species can be transformed into quota of another species at specified rates related to relative value, so called “cod equivalents.” This system reduces the likelihood or degree that the TAC of any particular species constrains catch of others but also allows catches of some species to exceed TACs which could lead to their depletion or collapse.