What Is a Primary Dealer?

A primary dealer is a bank or other financial institution that has been approved to trade securities with a national government. In many countries, primary dealers are the only entities who can make a bid for newly-issued government securities. A primary dealer in the U.S. may thus underwrite new government debt and act as a market maker for the U.S. 澳洲幸运5官方开奖结果体彩网:Federal Reserve, commonly referred to as the Fed.

Primary government securities dealers must meet specific liquidity and quality requirements. These are often large investm🎀ent banks or financial institutions. As such, primary dealers also provide a valuable flow of information to central banks about the state of domestic and global markets.

Note that a primary dealer should not be confused with a 澳洲幸运5官方开奖结果体彩网:prime broker.

Understanding Primary Dealers in the U.S.

Primary dealers in the U.S. are a system of banks and 澳洲幸运5官方开奖结果体彩网:broker-dealers authorized by the Federal Reserve System to deal directly in government bonds. This system was established in 1960 by the 澳洲幸运5官方开奖结果体彩网:Fed🐟eral Reserve Bank of New York (FRBNY) to implemenꦿt moneta꧂ry policy on behalf of the Fed.

By purchasing securities in the secondary market through the FRBNY, the government increases cash reserves in the banking system. The increase in reserves raises the 澳洲幸运5官方开奖结果体彩网:money supply in the economy. Conversely, selling securities results in a decrease in cash reserves. Lower reserves mean that fewer funds are available for lending, so the money supply falls. In effect, primary dealers are the Fed’s counterparties in 澳洲幸运5官方开奖结果体彩网:open market operations (OMO).

Primary dealers bid for government contracts competitively and purchase the majority of Treasury bills, bonds, and notes at auction. Primary government securities dealers sell the 澳洲幸运5官方开奖结果体彩网:Treasury securities that they buy fro💫m the central bank to their clients, creating the initial market. They are required to submit meaningful bids at new Treasury securities auctions.

Requirements for U.S. Primary Dealers

A firm must meet specific capital requirements before it can become a primary dealer. The capital requirement for broker-dealers that are not affiliated with a bank is $50 million. Banks acting as primary dealers must have at least $1 billion of Tier 1 capital (i.e., equity capital and disclosed reserves). Prospective primary dealers need to show they made markets consistently in Treasuries for at least a yeꦅar b💯efore their application.

Primary government securities dealers must also maintain at least a 0.25% market share. Broker-dealers applying for a spot in the primary dealer system must register with the 澳洲幸🌳运5官方开奖结果体彩网:Secꦅurities and Exchange Commission (SEC) or the 澳洲幸运5ꦆ官方开奖结果体彩网:Financial Industry Regulatory Authority (FINRA).

Once established, a primary dealer must submit accurate reports of their Treasury dealings to the New York Fed on a weekly basis. In addition, primary dealers are asked to respond to regular Fed surveys measuring market sentiment, economic expectations, and opinions about monetary policy measures. The Fed subsequently releases these statistics and data for use by the financial community and the general public.

Examples of Primary Dealers

Because of the strict requirements for primary dealers, many of them are famous financial firms. Some of the best-known primary dealers in the United States include JPMorgan Chase & Co, Barclays Capital, Wells Fargo, and Citigroup. TD Securities, Morgan Stanley, Cantor Fitzgerald, and Goldman Sachs are also primary dealers in the U.S.