Foreign Exchange Market Organization in Selected Developing and Transition Economies: Evidence from a Survey Jorge Iván Canales Kriljenko imf working paper wp04/4

C. Variable Scope for Price Discovery
Many central banks also affect the microstructure of their foreign exchange markets by 
limiting the scope for price discovery. This scope may be limited by an explicit adoption of 
an exchange rate regime with limited flexibility, by explicit regulation discouraging the 
process of price discovery, or by other central bank behavior.
Most survey respondents adopted exchange rate regimes that limited exchange rate 
flexibility. In particular, six countries adopted a hard peg, 36 followed regimes of 
intermediate flexibility including soft pegs, crawling pegs, and crawling bands, and 25 
adopted managed floating exchange rate regimes. The degree of exchange rate flexibility was 
limited by monetary and foreign exchange operations that affected foreign exchange order 
flow and short-term interest rates. In fact, almost all central banks in developing economies 
actively participate in their foreign exchange markets regardless of the exchange rate 
regimes, whether on their own behalf or on behalf of public sector entities. They usually 
enjoy a significantly wider information advantage over other market participants relative to 
the one recognized in the literature, partially arising from their ability to require confidential 

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information from main market participants and sometimes exercise moral suasion to 
influence pricing decisions of foreign exchange intermediaries (Canales-Kriljenko, 2003). 
Box 3. Selected Elements of Auction Design 
Auction rules varied significantly across the foreign exchange auctions captured in the survey.
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Auction participation: Auction participation was typically limited to primary dealers, which usually were 
chosen among resident financial institutions. Other institutions admitted in the auction included foreign 
exchange bureaus, importers and exporters, nonresident financial institutions, the public treasury, and mutual 
funds, cooperatives, private financial funds.