A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behavior and numbers of its primary dealers and impose conditions of entry. Some governments sell their securities only to primary dealers; some sell them to others as well. Governments that use primary dealers include India, Canada, France, Italy, Spain, the United Kingdom, and the United States.
Primary dealers in 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 could borrow at the Fed's discount window using several forms of collateral including mortgage-backed loans.
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 due 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.
- Bank of Nova Scotia, New York Agency
- BMO Capital Markets Corp.
- BNP Paribas Securities Corp.
- Barclays Capital Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Capital Markets America Inc.
- Deutsche Bank Securities Inc.
- Goldman, Sachs & Co.
- HSBC Securities (USA) Inc.
- Jefferies LLC
- J.P. Morgan Securities LLC
- Merrill Lynch, Pierce, Fenner & Smith Incorporated
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. LLC
- Nomura Securities International, Inc.
- RBC Capital Markets, LLC
- RBS Securities Inc.
- SG Americas Securities, LLC
- UBS Securities LLC.
- CCBS Handbooks, Bank of England, accessed October 5, 2011
- Federal Reserve Bank of New York: Primary Dealers. Retrieved April 27, 2007
- Federal Reserve Bank of New York:Primary Dealer Policies. Retrieved March 12, 2008
- Opensecrets.org: Revolving Door search result for Federal Reserve System. Retrieved February 11, 2009.
- Opensecrets.org: Revolving Door search result for Treasury (executive offices). Retrieved February 11, 2009.
- Operating Policy, Federal Reserve, January 11, 2010. Retrieved October 5, 2011
- Federal Reserve Bank of New York:Primary Dealer Credit Facility FAQ. Retrieved March 20, 2008
- "Primary Dealers List". Primary Dealers. New York Federal Reserve. Retrieved 2011-10-31.
- Primary Dealer List. January 12, 2011.
- Federal Reserve Bank of New York: Primary Dealer List. Retrieved October 31, 2011
- NY Federal Reserve - Primary Dealers
- USTreasuryMarket.com - Front-running by Primary Dealers described by former trader