Operational Guidelines of Primary Dealers

Primary dealers are subject to a number of operational guidelines, which are designed to ensure that they operate in a safe and sound manner and that they meet their responsibilities to the government and to the market.

These guidelines typically cover areas such as:

  • Capital adequacy: Primary dealers are required to maintain a certain level of capital adequacy, as measured by their Capital Adequacy Ratio (CAR). This is to ensure that they have the financial resources to withstand market shocks and to meet their obligations.
  • Risk management: Primary dealers are required to have in place a comprehensive risk management framework. This framework should identify, assess, and manage all of the risks that the primary dealer is exposed to.
  • Internal controls: Primary dealers are required to have in place a system of internal controls to ensure that their operations are conducted in a sound and efficient manner. This system should include controls over financial reporting, information technology, and operational activities.
  • Compliance: Primary dealers are required to comply with all applicable laws and regulations. This includes regulations governing the government securities market, as well as anti-money laundering and counter-terrorism financing regulations.

In addition to these general guidelines, primary dealers may also be subject to specific guidelines issued by the central bank or other regulatory authorities. For example, the Reserve Bank of India (RBI) has issued a number of operational guidelines for primary dealers in India, covering areas such as:

  • Underwriting: Primary dealers are required to underwrite all new government securities auctions.
  • Market making: Primary dealers are required to make markets in government securities in a fair and orderly manner.
  • Reporting: Primary dealers are required to submit regular reports to the RBI on their activities.

MCQs and answers

  1. Which of the following is NOT a typical operational guideline for primary dealers? (a) Capital adequacy requirement (b) Risk management requirement (c) Compliance requirement (d) Requirement to underwrite all new government securities auctions
  2. Which of the following is a benefit of having operational guidelines for primary dealers? (a) It helps to ensure that primary dealers operate in a safe and sound manner. (b) It helps to ensure that primary dealers meet their responsibilities to the government and to the market. (c) It helps to promote confidence in the government securities market. (d) All of the above
  3. Which of the following is a requirement for primary dealers in India? (a) To underwrite all new government securities auctions (b) To make markets in government securities in a fair and orderly manner (c) To submit regular reports to the RBI on their activities (d) All of the above

Answers:

  1. (d)
  2. (d)
  3. (d)

Additional notes

Operational guidelines for primary dealers are important because they help to ensure that the government securities market is safe and efficient. By following these guidelines, primary dealers can help to protect the interests of the government, investors, and the broader financial system.