Bankers Propose Bigger Role for Treasury Managing Dealer System

Wall Street bankers are asking the U.S. Treasury Department to get more involved in selecting and monitoring the 21 primary dealers that bid at government debt auctions and serve as counterparties to the Federal Reserve.

The 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 meeting yesterday of the Treasury Borrowing Advisory Committee, known as TBAC.

Industry consolidation has reduced the number of dealers in recent years, and the list includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc. TBAC, which meets quarterly to give the Treasury advice on debt markets, is proposing the department take a more active role in picking dealers, the selection of which is now mostly the job of Fed.

“One of the presenters noted that unlike many other countries, the primary dealer system for the United States is managed by the Federal Reserve, rather than the Treasury,” according to minutes of the meeting released today. “The presenter noted that it may be beneficial for Treasury to have a more active role in the management of the primary dealer system.”

The minutes were certified by committee Chairman Dana Emery, the chief executive officer of Dodge & Cox Inc., and by Curtis Arledge, vice chairman of Bank of New York Mellon Corp.

The Treasury asked the committee to analyze the primary dealer system, given changes in the financial services industry, market structure, regulation and technology.

Industry Change

The number of primary dealers has declined from 46 in 1988, while the size of the total marketable debt outstanding rose to $11.7 trillion from $1.7 trillion over the same period, according to TBAC.

While the Fed maintains the system, it is “essential” that the Treasury is explicitly involved in selecting and evaluating the performance of the primary dealers, according to TBAC.

“Treasury’s role in the selection and the evaluation of primary dealers should be more explicit,” the committee said in the presentation. “Treasury may desire to place additional requirements or oversight” over the dealers.

Jonathan Freed, a spokesman for the Federal Reserve Bank of New York, declined to comment.

The Treasury should periodically disclose performance evaluation of the dealers, as publicized rankings will help foster competition among the dealers, TBAC said.

While department officials said they’re not looking for any particular ways to change the primary dealer system, an evaluation was overdue.

“We want to take a stock of where we’re at, and we haven’t really covered the primary dealers system in a long period of time,” Matthew Rutherford, the department’s assistant secretary for financial markets, said at a news conference today. “There have been a number of changes, whether it’s through technology, direct bidding, etc.”

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