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Primary dealers
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A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States ("the Fed"). Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions. They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy.
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Encyclopedia
A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States ("the Fed"). Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions. They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.
Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market, for example, according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in world financial markets. Group membership changes slowly, with the current list available from the New York Fed.
The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.
In response to the subprime mortgage crisis and to the collapse of Bear Stearns, on March 19, 2008, the Federal Reserve set up the Primary Dealers Credit Facility (PDCF), whereby primary dealers can borrow at the Fed's discount window using several forms of collateral including mortgage backed loans.
History
The current system of primary dealers was set up in 1960 with 18 dealers. The number of primary dealers grew to 46 in 1988 and then declined to 21 in 2007.
In 2005 Fed trades with primary dealers averaged $550 million per day.
The newest primary dealer (effective on August 1, 2006) is Cantor Fitzgerald. The previous last major addition to the list (excluding name changes) was Countrywide Securities, which joined in 1999.
On September 15, 2006, ABN AMRO Bank, N.V., New York Branch withdrew its name from the list of primary dealers; CIBC World Markets Corp. withdrew on February 8, 2007; and Nomura Securities Inc. withdrew on November 30, 2007. However, in February 2009, Bloomberg reported that the Fed is considering adding several additional firms to the list of primary dealers, including Nomura Securities.
Current list
As of February 11, 2008 according to the Federal Reserve Bank of New York the list includes:
Three notable changes to the list have occurred in 2008. Countrywide Securities Corporation was removed on July 15 due to its acquisition by Bank of America. Lehman Brothers Inc. was removed on September 22 due to bankruptcy. Bear Stearns & Co. Inc. was removed from the list on October 1 due to its acquisition by J.P. Morgan Chase.
As of February 11, 2009, Merrill Lynch Government Securities Inc. was removed from the list due to its acquisition by Bank of America.
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