Primary dealers are financial institutions that have been designated by a central bank to participate in the primary market for government securities. They play a vital role in helping governments to raise funds and in developing the government securities market.
Early years
The concept of primary dealers originated in the United States in the early 1920s. At that time, the US Treasury Department was concerned about the lack of liquidity in the government securities market. To address this issue, the Treasury began to work with a small group of securities dealers to ensure that there was always a buyer for Treasury securities.
Formalization of the primary dealer system
In 1960, the US Federal Reserve System formalized the primary dealer system. The Fed designated 18 securities dealers as primary dealers. These dealers were required to meet certain financial and operational criteria, and they were given certain privileges, such as direct access to the Fed’s discount window.
Growth of the primary dealer system
The primary dealer system has grown significantly over the years. Today, there are 24 primary dealers in the United States. Primary dealers also play an important role in government securities markets in many other countries, including the United Kingdom, Japan, and India.
Evolution of the primary dealer role
The role of primary dealers has evolved over time. In the early days, primary dealers were primarily focused on underwriting and selling new government securities. However, today, primary dealers play a much broader role. They also act as market makers in government securities, providing liquidity to the market and helping to ensure that prices are fair and orderly. Primary dealers also play an important role in the development of new government securities products and in providing advice to governments on debt management.
MCQs and answers
- Which of the following is NOT a function of primary dealers? (a) Underwriting new government securities (b) Making markets in government securities (c) Providing advice to governments on debt management (d) Investing in government securities on their own behalf
- Which of the following is TRUE about the primary dealer system in the United States? (a) There are currently 24 primary dealers. (b) Primary dealers are required to meet certain financial and operational criteria. (c) Primary dealers have direct access to the Fed’s discount window. (d) All of the above
- The primary dealer system has evolved over time. Which of the following statements is TRUE about the evolution of the primary dealer role? (a) Primary dealers are now more focused on market making and less focused on underwriting new government securities. (b) Primary dealers now play a more important role in the development of new government securities products. (c) Primary dealers now play a more important role in providing advice to governments on debt management. (d) All of the above
Answers:
- (d)
- (d)
- (d)