Did You Know? The Primary Dealers

Most U.S. Citizens are aware of the large amount of debt carried by the U.S. Government.  It is currently about $21 trillion and growing daily.   Moreover, additional government borrowing in the future will only increase the debt level.  As long as there are budget deficits, the debt will grow steadily higher.   Hence, it is imperative that the U.S. Government have in place a system where it can issue debt efficiently and do so in a manner that large investors (and small) investors can have access to the treasury debt market.     

Enter the Primary dealers (aka Primary Government Securities Dealers). The function of the primary dealers is to buy and sell government securities directly from the U.S. Government through the Federal Reserve Bank of New York (NY). If the government needs to borrow $100 billion in the next quarter, the primary dealers allow the government to sell the debt to the dealers, who in turn sell the securities to institutional investors, such as money managers and pension funds. 

The Government funds the deficit by issuing debt.  This debt has varying maturities; 3-mo and 6-month U.S. Treasury bills are the shortest maturities and carry the lowest yields, primarily because their short maturities and risk-free nature. The U.S. government has never failed to pay its debts hence treasuries are regarded as one of the safest investments in the world.  The government also issues Treasury notes, maturing in 2-10 years, and bonds that generally mature in 20-30 years.

The government holds auctions each week for treasury bills and monthly or quarterly for notes and bonds. The primary dealers are required to bid on government debt and then skillfully take the new inventory and sell it to larger investors around the world, including other governments and sovereign wealth funds.  Sometimes the primary dealers will carry treasury debt on the books (they have been known to hedge this inventory using Treasury futures as well) but usually they sell it to avoid the risk of holding too high a concentration of debt at any given time.   

Primary dealers are also the primary counterparty when the Federal Reserve Bank of NY conducts its open market operations.  These operations are how the Fed controls the money supply in the United States, and in doing so, tries to control inflation and set monetary policy.  The control of the money supply is accomplished by buying and selling government securities from the dealers.  Buying securities usually adds reserves to the system and selling securities drains reserves from the system. 

The network of primary dealers began in 1960 and at its peak had 46 primary dealers.  Due to consolidation and mergers the number of primary dealers now stands at 23.   They are listed below.  Many are household names in finance.

The network of primary dealers began in 1960 and at its peak had 46 primary dealers. Due to consolidation and mergers the number of primary dealers now stands at 23. They are listed below. Many are household names in finance.

As of June 13, 2018, according to the Federal Reserve Bank of New York the list includes:

• 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 AG, New York Branch
• Daiwa Capital Markets America Inc.
• Deutsche Bank Securities Inc.
• Goldman Sachs & Co. LLC
• HSBC Securities (USA) Inc.
• Jefferies LLC
• J.P. Morgan Securities LLC
• Merrill Lynch, Pierce, Fenner & Smith Incorporated
• Mizuho Securities USA LLC
• Morgan Stanley & Co. LLC
• NatWest Markets Securities Inc.
• Nomura Securities International, Inc.
• RBC Capital Markets, LLC
• Societe Generale, New York Branch
• TD Securities (USA) LLC
• UBS Securities LLC.
• Wells Fargo Securities LLC.