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

The scope for market making is limited by regulations about net open foreign exchange 
positions. Most survey countries permit banks and bureaus to hold overnight net open 
foreign exchange positions subject to quantitative limits.
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A few countries impose daily 
variation limits to banks’ net open position to avoid a sudden build-up of these positions 
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About half of the survey countries require the consolidation of foreign exchange positions 
across branches. Consolidation has its pros and cons. It may reduce the possibility that banks 
obscure the exchange rate risks in unsupervised institutions, but it may also complicate or 
cloud the analysis when the branches are in different time zones and in countries with 
exchange controls (Abrams and Beato, 1998). 

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from sharply affecting the exchange rate (Box 2).
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Some countries require banks, instead or 
besides, to hold extra capital for the exchange rate risk they assume. Capital requirements for 
exchange rate risk are present in about half of the survey countries. Most of these countries 
measured the exchange rate risk in terms of net open positions but a few measured them in 
terms of internal models, following value-at-risk calculations. 
Box 2. Prudential Regulation of Net Open Foreign Exchange Positions 
Most survey respondents impose quantitative limits on the overall position, although they differ in their 
choice of the methods proposed by the Basel Committee for computing them. Of the respondents imposing 
overall limits, about 40 percent used the net aggregated position, defined as the absolute value of the difference 
between the sum of all long positions and the sum of all short positions. Another 35 percent used the shorthand 
method, which is defined as the sum of all long positions or the sum of all short positions, whichever is greater. 
Finally, about 25 percent used the gross aggregated position, defined as the sum of all long positions plus the 
sum of all short positions. About 40 percent of survey respondents also limit single currency positions.