Primary Dealers Investment Guidelines

Primary dealers are subject to a number of investment guidelines, which are designed to ensure that they manage their portfolios in a prudent and responsible manner. These guidelines typically cover areas such as:

  • Investment concentration: Primary dealers are typically limited on the amount of money they can invest in any single security or issuer. This is to reduce the risk of losses in the event of a default.
  • Risk management: Primary dealers are required to have in place a risk management framework to identify, assess, and manage the risks associated with their investment portfolios. This framework should include limits on position sizes, exposure to different sectors and markets, and liquidity needs.
  • Investment objectives: Primary dealers are typically required to invest in a diversified portfolio of government securities. This helps to reduce risk and to ensure that they are able to meet their obligations to the government and to the market.

Here are some specific examples of primary dealer investment guidelines from different countries:

  • United States: Primary dealers in the United States are subject to investment guidelines issued by the Federal Reserve Bank of New York. These guidelines include limits on position sizes, exposure to different sectors and markets, and liquidity needs. Primary dealers are also required to have in place a risk management framework to identify, assess, and manage the risks associated with their investment portfolios.
  • India: Primary dealers in India are subject to investment guidelines issued by the Reserve Bank of India (RBI). These guidelines include limits on investment concentration, exposure to different sectors and markets, and liquidity needs. Primary dealers are also required to have in place a risk management framework to identify, assess, and manage the risks associated with their investment portfolios.

MCQs and answers

  1. Which of the following is NOT a typical primary dealer investment guideline? (a) Investment concentration limit (b) Risk management requirement (c) Investment objective of a diversified portfolio of government securities (d) Requirement to underwrite all new government securities auctions
  2. Which of the following is a benefit of having investment guidelines for primary dealers? (a) It helps to reduce the risk of losses for primary dealers. (b) It helps to ensure that primary dealers meet their obligations 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 an example of a primary dealer investment guideline from the United States? (a) Limit on position size (b) Exposure limit to different sectors and markets (c) Liquidity requirement (d) All of the above

Answers:

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

Additional notes

Primary dealer investment guidelines are important because they help to ensure that primary dealers manage their portfolios in a prudent and responsible manner. This helps to reduce the risk of losses for primary dealers, to ensure that they meet their obligations to the government and to the market, and to promote confidence in the government securities market.