A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States.[1] They 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.[2] 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.[1][2]
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.[1]
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.[3]
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.[4]
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.[5] As of August 4, 2008, the last update to the official list was July 15, 2008.[6] Effective July 15, 2008 Countrywide has been removed from the list, due to its takeover by Bank of America announced on January 11, 2008.
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.
On August 31 2008, Commerzbank announced that it would acquire Dresdner Bank, ending Dresdner Kleinwort Wasserstein Securities' tenure as a primary dealer.
On September 15, 2008, Lehman Brothers declared Chapter 11 bankruptcy and ceased being a primary dealer. On the same day, Merrill Lynch was acquired by Bank of America, and will cease to be a primary dealer when the acquisition closes.
Effective October 1, 2008, Bear, Stearns & Co. was deleted from the list of primary dealers as a result of their acquisition by J.P. Morgan Securities Inc.[7]
Current list
As of September 22, 2008 according to the Federal Reserve Bank of New York the list includes:
Many changes to the list have occured during 2008. Two primary dealers, J.P. Morgan Securities Inc. and Bear Stearns & Co. Inc., are expected to merge sometime later this year. Dresdner Kleinwort was bought by Commerzbank on August 31. Lehman Brothers filed for bankruptcy on September 15 and Merrill Lynch was acquired by Bank of America on the same day.
References
- ^ a b Federal Reserve Bank of New York:Primary Dealers. Retrieved April 27, 2007
- ^ Reserve Bank of New York:Primary Dealer Policies. Retrieved March 12, 2008
- ^ Federal Reserve Bank of New York:Primary Dealer Credit Facility FAQ. Retrieved March 20, 2008
- ^ "Fedpoint". Primary Dealers. New York Federal Reserve. Retrieved on 2007-10-30.
- ^ Welcome to Countrywide Capital Markets. Retrieved on April 27, 2007.
- ^ List of Primary Dealers, New York Federal Reserve
- ^ http://www.newyorkfed.org/newsevents/news/markets/2008/an081001
External links
|
