Primary dealers
Encyclopedia
Primary dealer is a formal designation of a firm as a market maker
of government securities. Primary dealer systems are present in many countries including Canada, France, Italy, Spain, the United Kingdom, and the United States.
In the United States
, a primary dealer is a bank
or securities broker-dealer
that is permitted to trade directly with the Federal Reserve System
("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.
The relationship between the Fed and the primary dealers is governed by the Primary Dealers Act of 1988 and the Fed's operating policy "Administration of Relationships with Primary Dealers."
Primary 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 foreign exchange trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in global 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.
The most recent additions to the list of primary dealers were Bank of Nova Scotia, New York Agency and BMO Capital Markets Corp., both named on October 4, 2011. Name changes of the firms are fairly common as are withdrawals dues to mergers, for example, when Merrill Lynch was taken over by Bank of America, the Merrill Lynch name was at first withdrawn but the Bank of America dealer firm was later renamed Merrill Lynch.
the list includes:
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
of government securities. Primary dealer systems are present in many countries including Canada, France, Italy, Spain, the United Kingdom, and the United States.
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a primary dealer is a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or securities broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
that is permitted to trade directly with the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
("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
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
securities auctions. They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
. 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
Revolving door (politics)
The revolving door is the movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies. In some cases the roles are performed in sequence but in certain circumstances may be performed at the same time...
policy.
The relationship between the Fed and the primary dealers is governed by the Primary Dealers Act of 1988 and the Fed's operating policy "Administration of Relationships with Primary Dealers."
Primary 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
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
are also primary dealers, and between them account for almost 73% of foreign exchange trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in global 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
BNP Paribas
BNP Paribas S.A. is a global banking group, headquartered in Paris, with its second global headquarters in London. In October 2010 BNP Paribas was ranked by Bloomberg and Forbes as the largest bank and largest company in the world by assets with over $3.1 trillion. It was formed through the merger...
, Barclays, Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
, and RBS Greenwich Capital
RBS Greenwich Capital
RBS Securities Inc. is the Royal Bank of Scotland Group's U.S. investment bank/broker-dealer based in Stamford, Connecticut that specializes in fixed income arbitrage and other fixed income strategies...
(a division of the Royal Bank of Scotland
Royal Bank of Scotland
The Royal Bank of Scotland Group is a British banking and insurance holding company in which the UK Government holds an 84% stake. This stake is held and managed through UK Financial Investments Limited, whose voting rights are limited to 75% in order for the bank to retain its listing on the...
) 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
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
and to the collapse of Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
, 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
Discount window
The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions...
using several forms of collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
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, declined to 21 by 2007 and stands at 21 in October 2011.The most recent additions to the list of primary dealers were Bank of Nova Scotia, New York Agency and BMO Capital Markets Corp., both named on October 4, 2011. Name changes of the firms are fairly common as are withdrawals dues to mergers, for example, when Merrill Lynch was taken over by Bank of America, the Merrill Lynch name was at first withdrawn but the Bank of America dealer firm was later renamed Merrill Lynch.
Current list
As of October 31, 2011 according to the Federal Reserve Bank of New YorkFederal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
the list includes:
- Bank of Nova Scotia, New York Agency
- BMO Capital Markets Corp.Bank of MontrealThe Bank of Montreal , , or BMO Financial Group, is the fourth largest bank in Canada by deposits. The Bank of Montreal was founded on June 23, 1817 by John Richardson and eight merchants in a rented house in Montreal, Quebec. On May 19, 1817 the Articles of Association were adopted, making it...
- BNP Paribas Securities Corp.BNP ParibasBNP Paribas S.A. is a global banking group, headquartered in Paris, with its second global headquarters in London. In October 2010 BNP Paribas was ranked by Bloomberg and Forbes as the largest bank and largest company in the world by assets with over $3.1 trillion. It was formed through the merger...
- Barclays Capital Inc.Barclays CapitalBarclays Capital is a global British investment bank. It is the investment banking division of Barclays plc which has a balance sheet of over £1.2 trillion . Barclays Capital provides financing and risk management services to large companies, institutions and government clients. It is a primary...
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.CitigroupCitigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
- Credit Suisse Securities (USA) LLCCredit SuisseThe Credit Suisse Group AG is a Swiss multinational financial services company headquartered in Zurich, with more than 250 branches in Switzerland and operations in more than 50 countries.-History:...
- Daiwa Capital Markets America Inc.
- Deutsche Bank Securities Inc.Deutsche BankDeutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
- Goldman, Sachs & Co.Goldman SachsThe Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
- HSBC Securities (USA) Inc.HSBCHSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
- Jefferies & Company Inc.
- J.P. Morgan Securities LLCJPMorgan Chase & Co.JPMorgan Chase & Co. is an American multinational banking corporation of securities, investments and retail. It is the largest bank in the United States by assets and market capitalization.It is a major provider of financial services, with assets of $2 trillion and according to Forbes magazine is...
- Merrill Lynch, Pierce, Fenner & Smith Incorporated
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. IncorporatedMorgan StanleyMorgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
- Nomura Securities International Inc.Nomura Securities Co.is a wholly owned subsidiary of Nomura Holdings, Inc. , which forms part of the Nomura Group. It plays a central role in the securities business, the Group's core business. Nomura is a financial services group and global investment bank. Based in Tokyo and with regional headquarters in Hong Kong,...
- RBC Capital Markets, LLCRoyal Bank of CanadaThe Royal Bank of Canada or RBC Financial Group is the largest financial institution in Canada, as measured by deposits, revenues, and market capitalization. The bank serves seventeen million clients and has 80,100 employees worldwide. The company corporate headquarters are located in Toronto,...
- RBS Securities Inc.RBS Greenwich CapitalRBS Securities Inc. is the Royal Bank of Scotland Group's U.S. investment bank/broker-dealer based in Stamford, Connecticut that specializes in fixed income arbitrage and other fixed income strategies...
- SG Americas Securities LLC.Société GénéraleSociété Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La...
- UBS Securities LLC.