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Fed’s primary dealer expansion seen aiding markets

Fed’s primary dealer expansion seen aiding markets
On Wednesday October 5, 2011, 3:33 pm
By Emily Flitter

NEW YORK (Reuters) – The Federal Reserve Bank of New York’s designation this week of two Canadian banks as primary dealers comes at a crucial time in which rates markets need all the liquidity they can get, analysts said on Wednesday.

Expanding the number of primary dealers will help keep the Treasury market and other short-term rates markets liquid, and is especially crucial as French banks continue to grapple with the euro zone debt crisis, the analysts said.

Primary dealers are the financial firms authorized to help the Federal Reserve carry out monetary policy and to bid directly at Treasury auctions on behalf of clients. The number of primary dealers once neared 40, but there are currently 22 on the list, counting the newest additions.

Two French banks that have struggled recently, Societe Generale (Paris:SOGN.PA – News) and BNP Paribas (Paris:BNPP.PA – News), operate securities firms that are designated as primary dealers.

The two French banks are among several European institutions that have had to pay more for dollar funding, have seen their share prices fallen, and have had to arrange to sell assets to raise capital.

While there is no indication that SocGen’s and BNP’s problems are serious enough to jeopardize their primary dealer status just yet, they would exit the list de facto if they failed and likely also if they had to merge with other banks.

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