Primary dealers are trading counterparties of the New York Fed in the implementation of monetary policy. The make markets for the NY Fed as needed, and bid on a pro-rate basis in all Treasury auctions at reasonably competitive prices.
There are 24 banks designated as primary dealers. Well known banks that are primary dealers include JP Morgan, Wells Fargo, Bank of America, Citi Group, Deutsche Bank, just to name a few.
Why do we have primary dealers?
Primary dealers are counterparties who buy government securities and resell them to the overall market. These are banks that have an inside track to buy US Treasuries.
Primary dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction. They will then resell those securities to the public. Their activities extend well beyond the Treasury market.
Arguably, this group’s members are the most influential and powerful non-governmental institutions in global financial markets.
Where are primary dealers located?
Many dealers are in the US. There are also dealers across the globe, including Japan and Europe that distribute US Treasuries to those geographical areas of the world.
What are the requirements for primary dealers?
Firms must meet specific capital requirements before it can become a primary dealer.
The capital requirements for broker-dealers that are not affiliated with a bank is $50 million. Banks acting as primary dealers need to have $1 billion of Tier 1 capital (equity capital and disclosed reserves).
Prospective primary dealers need to show they made markets consistently in Treasuries for at least a year before their application.