Bloomberg News

New York Fed Names BMO, Bank of Nova Scotia Primary Dealers

October 04, 2011

(Updates with investor comment in fourth paragraph.)

Oct. 4 (Bloomberg) -- The Federal Reserve Bank of New York named BMO Capital Markets Corp. and Bank of Nova Scotia, New York Agency as primary dealers.

The appointments are effective today, according to the New York Fed’s website. The change increases the number of securities firms in the network that underwrite the government’s debt to 22, the most since February 2007.

The Fed has added seven primary dealers since June 2009 while using unconventional policy tools to stem the financial crisis that began in August 2007. One firm has left the network of counterparties. In its latest stimulus measure, the Fed on Sept. 21 decided to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to further reduce borrowing costs and counter rising risks of a recession.

“An increase in the amount of dealers available will help create a more efficient process with the activity that’s going to be coming up in rebalancing their balance sheet,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “They’re looking to cover the bases and make sure the process they’re going to go through is going to be smooth and it’s not going to be disruptive to the marketplace.”

Primary dealers serve as counterparties in open market operations, the central bank’s mechanism for maintaining its target rate for overnight loans between banks as well as its purchases and sales of securities. Primary dealers also are expected to bid when the Treasury sells bills, notes and bonds.

Expanded Roster

The central bank added Jefferies & Co., RBC Capital Markets LLC, and Nomura Securities International Inc. in 2009 and earlier this year expanded its roster to include Societe Generale SA and MF Global Holdings Ltd. Dresdner Kleinwort Securities LLC withdrew from the dealership role in 2009.

Demand has reached a record $3 for every dollar of debt sold at the $1.6 trillion in Treasury auctions this year. The U.S. sold a record $2.249 trillion of notes and bonds last year, up from $922 billion in 2008.

Non-primary dealers have increased their purchases of Treasuries at auctions this year. Firms bidding outside of the dealer network bought 10 percent or more of the securities in 36 of 63 note and bond auctions this year and at 55 of 81 offerings in 2010, compared with only 6 times from 2004 to 2008, according to Treasury data.

Many traders believe aspiring dealers use the direct bidding system because “they need to prove themselves to the Fed,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

--Editors: James Tyson, Kevin Costelloe

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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