New York Fed Awards Primary Dealership to Toronto-Dominion Bank

The Federal Reserve Bank of New York named TD Securities, the investment-banking unit of Canada’s largest lender by assets, a primary dealer in the first expansion of its roster of counterparties since 2011.

The appointment is effective as of yesterday, according to the New York Fed’s website. The change increases the number of dealers in the network that underwrite the government’s almost $12 trillion in debt to 22, the most since the Fed suspended MF Global Holdings Ltd. amid record trading losses that led to its collapse in October 2011.

The Fed has added eight dealers since June 2009 while using unconventional policy tools to stem the financial crisis that began in August 2007. Policy makers said on Jan. 19 they would reduce monthly bond purchases for a second time, bringing the total to $65 billion. The Fed has also expanded the number of counterparts for its fixed-rate reverse repo program. The facility is being tested as tool for when the central bank eventually reverses its unprecedented monetary accommodation.

“The Fed knows that this game is coming,” David Leduc, the Boston-based chief investment officer at Standish Mellon Asset Management Co. “When you embark on something this extra-ordinary, which was an unprecedented policy of buying securities out of the market, my hope would be that even if they’re not ready to do it, that they’ve thought about the exit.”

Canadian Dealers

The Fed has added eight primary dealers since June 2009 while using unconventional policy tools to stem the financial crisis that began in August 2007. In addition to MF Global, Dresdner Kleinwort Securities LLC also left the network of counterparties after withdrawing in 2009.

Canada’s banks have been cited as the world’s soundest for six straight years by the World Economic Forum. The dealership awarded to the unit of Toronto-Dominion Bank is the fourth for Canadian lenders. All have been awarded since 2009, in the aftermath of the global financial crisis kicked off by rising delinquency and default rates on the riskiest mortgage loans to U.S. home buyers.

“TD Securities provides best-in-class research and analysis to our clients and we’re thrilled to now provide that level of support to the New York Fed’s trading desk in its execution of monetary policy,” said Bob Dorrance, president and chief executive officer of TD Securities. “The primary dealer designation aligns well with TD’s North American footprint and TD Securities’ growth strategy into the U.S. fixed-income market.”

Reverse Repos

Primary dealers serve as counterparties in open-market operations, the central bank’s mechanism for maintaining its target rate for overnight loans between banks as well as its purchases and sales of securities. Primary dealers also are expected to bid when the Treasury sells bills, notes and bonds.

As well as the primary dealers, the reverse-repo facility is open to 94 money-market mutual funds, six government-sponsored entities and 18 banks.

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties.

The Fed began the unprecedented expansion of its balance sheet to a record $4.1 trillion as of Feb. 5, from $924 billion at the time of the collapse of Lehman Brothers Holdings Inc. in September 2008.

Dealer History

Wall Street bankers asked the U.S. Treasury Department last week to get more involved in selecting and monitoring primary dealers.

The central bank added Jefferies & Co., RBC Capital Markets LLC, and Nomura Securities International Inc. in 2009 and in 2011 expanded its roster to include BMO Capital Markets, Bank of Nova Scotia, Societe Generale SA and MF Global Holdings. The dealership roster peaked at 46 firms in 1988.

Demand at Treasury note and bond auctions was the fourth highest on record last year as investors bid 2.87 times the $2.14 trillion sold. That was down from a record 3.15 times for the $2.153 trillion sold in 2012. Non-primary dealers have increased their purchases of Treasuries at auctions to a record 17.7 percent of notes and bonds last year, up from 14.4 percent in 2013 and from 2.5 percent in 2008, according to Treasury data compiled by Bloomberg. The dealers were awarded 46.1 percent of notes and bonds at last year’s offerings, the fewest since 2010 and down from 68.6 percent in 2008.

TBAC Minutes

Treasury should periodically disclose performance evaluation of the dealers, as publicized rankings will help foster competition among the banks and securities companies, according to a presentation at a Feb. 4 meeting of the Treasury Borrowing Advisory Committee, known as TBAC.

While the network “works well for routine debt issuance in normal market conditions,” some TBAC members raised concerns about the declining number of dealers and the increasing amount of government securities being sold to direct bidders, the committee said in its statement released Feb. 5.

TBAC participants also raised the possibility of allowing dealers to make post-auction securities purchases within agreed upon and disclosed limits and for the potential use of underwriting syndicates should the Treasury try to sell “non-standard securities, such as longer-dated maturities,” the statement said.

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