The term primary dealer refers to a bank or broker that is authorized to trade directly with the New York Federal Reserve. Primary dealers are expected to make markets in support of the Federal Reserve’s monetary policy.
A primary dealer can be a securities broker or bank that has applied for, and was granted, the right to trade directly with the New York Federal Reserve as part of its open market operations (OMO). These firms are also expected to actively participate in auctions of US Treasury securities, and consult with the Fed on topics such as monetary policy. For example, primary dealers are expected to participate in repo operations as well as those involving agency debt or mortgage-backed securities.
Firms that are interested in becoming a primary dealer can contact the New York Fed directly and provide proof of qualifications, including:
- Being either a broker-dealer or government securities broker, registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority, Inc.
- Meet certain net regulatory capital thresholds.
- Demonstrate substantial authority as a market maker, providing liquidity in government securities.
- Capabilities that include the ability to bid on a consistent basis for its pro rata share of Treasury securities while providing competitive bids.
- Sufficient financial capacity to post margin for transactions involving mortgage-backed securities.
- Documented and tested Business Continuity Plans to ensure participation in Treasury auctions and desk operations.
- Once accepted as a primary dealer, participating financial institutions are expected to continue to meet the above eligibility criteria.