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

This information is lost as the volume of interbank market turnover increases, unless reporting requirements 
are modified. In transactions among banks, foreign exchange market turnover usually differs from order flow. It is 
not possible to know in a transaction among banks which bank initiated the transaction by just looking at the 
volume of the transaction. In countries where the central bank observes transactions that take place among banks 
through an electronic broking system, the central bank may be able to compute order flow directly. This would, 
however, only cover a fraction of the total order flow in the market, since banks can usually trade among each other 
outside the broking systems. Alternatively, central banks that impose reporting requirements on foreign exchange 
market turnover could directly request banks to provide order flow statistics. This would allow for better research 
and could provide a way to confirm information informally obtained in the market to identify the source of 
pressures on the exchange rate. Nevertheless, the information could also be used to exert moral suasion on market 
participants taking positions contrary to central bank interests. 

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Parallel markets handle foreign exchange transactions, which although illegal, are 
sometimes tolerated. Parallel markets may arise to evade not only exchange and capital 
controls but also monetary regulations, which are prevalent in survey countries (Canales-
Kriljenko, 2003). These regulations define the monetary uses residents can make of foreign 
exchange and those uses that nonresidents can give to the domestic currency. Thus, parallel 
market spreads may reflect not only capital flight pressures, but those arising from changes in 
the degree of currency substitution and dollarization in the economy.
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