Chapter

Appendix 2. Complete Survey Results by Country

Author(s):
Marco Arnone, and Piero Ugolini
Published Date:
February 2005
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Argentina
Dealers in government securities12.
System establishedApril 1, 1996.
PD institutions12 commercial and investment banks.
Selection criteriaMinimum capital and involvement in government securities markets.
PD obligationsObligations to bid in the auctions; to report to the central bank; to quote firm; and to achieve a certain market share in the secondary market.
PrivilegesExclusive counterparty for Secretariat of the Treasury’s open market operations; participation in a second round of primary auctions; and bidding in noncompetitive tranche in a maximum amount.
Supervision and enforcementMinistry of Finance, as agreed in a Decree and a Resolution of the Secretariat of the Treasury.
Formal agreementNo, the legal support is a Decree and a Resolution of the Secretariat of the Treasury.
Revision of statusAnnually.
System evolution over timeFavorable evolution since 1996; currently working on improving the distribution to new investors and the secondary market liquidity.
Relation between the size of public debt and the desirability of PDNo, the access to Argentina primary dealer mechanism is not restricted for any financial institution in the country.
Recommendation of PD systemStrongly recommended. The PD system is an important ingredient for economic and financial development. We believe that it is worthwhile to apply it in any stage of development.
AdvantagesThe PD commitment ensures the allocation of an important portion of public debt. It also specializes financial institutions dedicated to the local market.
DisadvantagesDifferences among participants (PDs) might limit competition.
Armenia
Dealers in government securities13.
System establishedOctober 1999.
PD institutionsSeven commercial banks.
Selection criteriaMinimum capital, involvement in government securities market, and because all PDs are commercial banks, they should meet all requirements set by the central bank for the commercial banks.
PD obligationsTo bid in the auctions, to quote two ways, to report to the central bank, and noncompetitive bids of the PDs should be less than 1 percent of the total issue. If their noncompetitive bids exceed 1 percent, their competitive bids should be five times greater than noncompetitive bids.
PrivilegesExclusive counterparty for central bank’s open market operations. PDs are allowed to bid for the whole issue, while other dealers can bid only for part of the issue. Only PDs are allowed to have noncompetitive bids.
Supervision and enforcementCentral bank and Ministry of Finance.
Formal agreementYes, there are regulations, setting rules for issuance, circulation, and repayment of government securities; and rights and obligations of the government, central bank, and dealers. Also there are separate agreements between the central bank and each of the dealers.
Revision of statusSemiannually.
System evolution over timeThe PD system in Armenia was established in October 1999. Since then some amendments were made to the regulations ruling the government securities market. The structure of the PD system is periodically reviewed and some primary dealers were replaced by others. A book-entry government securities electronic trade system for the primary market has been in operation since November 2000, and the pilot project of a book-entry system for the secondary market is now undergoing testing.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemStrongly recommended at the early development stage. Introduction of a PD system in the early stage of economic and financial development can help to create a more liquid primary and secondary market of government securities and bring interest rates down.
AdvantagesBetter participation in the auctions, higher liquidity of government securities market.
DisadvantagesNA.
Australia
Dealers in government securities12.
PD institutionsNo primary dealers.
System evolution over timeEstablishing a PD system has not been considered.
Relation between the size of public debt and the desirability of PDYes, in relatively small undeveloped bond markets, PDs may be advantageous while in large developed markets, PDs are likely to be less advantageous.
Recommendation of PD systemIn certain circumstances, there may be advantages in having PDs, while in other circumstances PDs may be unnecessary and/or may interfere with the efficient operation of the market. The answer depends on market environment or development. For some markets, PDs may be strongly recommended, while for other markets they may be unnecessary or inappropriate. For bond markets at an early stage of development, PDs can often assist with the development of the market. This can occur through a variety of channels. For example, for those dealers that are required to quote two-way prices in the secondary market, this could encourage greater secondary market liquidity and possibly lead to more investors participating in the market than would otherwise be the case.
Advantages- Can boost liquidity and development of the market.
- Primary issuance can be underwritten (to some extent).
Disadvantages- May discourage participation by some potential intermediaries not designated as PDs.
- Investors cannot directly purchase securities at time of primary issue.
Austria
System established1989.
PD institutions26 investment banks and foreign institutions.
Selection criteriaInvolvement in government securities market, placement power, efficient bond trading.
PD obligationsTo bid in the auctions and to quote firm.
PrivilegesExclusive access to primary auctions, noncompetitive bid option, good performance presents chance to lead a syndicated (or arbitrage) transaction or swaps.
Supervision and enforcementAustrian Federal Financing Agency.
Formal agreementAuction agreement, debt issuance program.
Revision of statusAnnually.
System evolution over timeThe PD system in Austria was established in 1989.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemRecommended.
AdvantagesProviding permanent services.
DisadvantagesNA.
Belgium
Dealers in government securities22.
System established1991.
PD institutions17 commercial and investment banks.
Selection criteriaInvolvement in government securities market and placement capacity.
PD obligationsTo bid in the auctions, to quote firm and two ways, to report to the central bank, and to promote the debt.
PrivilegesExclusive access to primary auctions and counterparty for operations with Treasury.
Supervision and enforcementMinistry of Finance.
Formal agreementCode of duties.
Revision of statusAnnually.
System evolution over timeInternationalization of the primary dealers. Transactions with the Treasury are exclusively with the PDs, contrary to previous practice.
Relation between the size of public debt and the desirability of PDYes, the greater the size of the debt, the more important the placement capacity becomes. This is where PDs help.
Recommendation of PD systemStrongly recommended at the early development stage. A modern capital market with a smooth functioning primary and secondary market is necessary, so reasonable obligations can be imposed.
Advantages- Reaches additional investors.
- Provides a focus on placing and trading of debt, compensated by special privileges.
DisadvantagesA concentration of PDs is developing in the banking community the world over, with the same PDs evident globally. The result is a certain degree of oligopoly power.
Brazil
Dealers in government securities338 financial institutions authorized to take part in public offerings of government securities. Thus, all of them are able to negotiate with government securities.
System establishedPD system established in 1974.
PD institutions22 PDs composed of commercial and investment banks, brokers, and foreign institutions.
Selection criteriaMinimum capital, compatible with the minimum capital requirements of a commercial bank; involvement in government securities primary and secondary markets; capability to remain market makers; participation in open market operations; and relationship with the trading desk.
PD obligationsThe PDs should be actively present when the central bank trading desk operates; keep the central bank constantly informed of facts that directly or indirectly affect the stability and liquidity of the market; provide daily information to the central bank about its activities; give priority to trading and to the routine or special contacts with the central bank.
PrivilegesExclusive counterparty for central bank’s open market operations; participation in regular meetings with the Treasury and the central bank.
Supervision and enforcementCentral bank.
Formal agreementNo, there is no formal agreement. But the selection criteria and their obligations are listed in a formal regulation (Circular 2.993 of August 9, 2001 and Carta-Circular 2.924). The selection process is fully transparent and the partial rankings are updated monthly on the central bank’s web page.
Revision of statusSemiannually.
System evolution over timeUp to 1973, the central bank operated with approximately 53 financial institutions (period before the establishment of the PD system). From 1974 to August 1992, the number of PDs was 25 and there was no formal regulation although the bank already used ranking procedures to select the PDs. From August 1992 to present, the selection criteria and the PD obligations were released in a formal rule, and therefore the system became more transparent.
Relation between the size of public debt and the desirability of PDThe number of PDs has been established in accordance with the number of dealers in government securities and considering the central bank’s needs in terms of its relationship with the market.
Recommendation of PD systemRecommended at all development stages.
AdvantagesPrimary dealers help the central bank in its function of keeping the market informed about the implementation of the monetary policy; and their assistance in the execution of open market operations (outright operations and repurchase agreements) is aimed at adjusting the day-to-day needs to add or drain reserves of the system.
DisadvantagesCreation of some information asymmetry.
Canada
Dealers in government securities22 in marketable bonds and 22 in treasury bills.
System established1998.
PD institutions12 PDs, of which 11 are in marketable bonds and 9 in treasury bills. PDs are composed of commercial and investment banks, and brokers.
Selection criteriaMinimum capital, involvement in government securities market, and PDs must be official Government Securities Dealers (GSDs). GSDs must (1) be members, or affiliates of members, of the Investment Dealer Association (IDA) of Canada, and (2) have their core trading and sales operations for the Government of Canada securities resident in Canada.
PD obligationsObligations to bid in the auctions, to quote firm and two ways, to report to the central bank, and obligations as indicated in the Terms of Participation in Auctions for Government of Canada Securities Distributors. Also, all GSDs (and by design, PDs) must agree to comply with IDA Policy No. 5, the Code of Conduct.
PrivilegesExclusive counterparty for the central bank’s open market operations, along with borrowing privileges with the central bank.
Supervision and enforcementCentral bank, ministry of finance, and IDA—secondary markets.
Formal agreementTerms of Participation in Auctions for Government of Canada Securities Distributors and IDA Policy No. 5, the Code of Conduct.
Revision of statusBiannually.
System evolution over time- New rules in effect in 1998.
- Main goal: to ensure that the auction process is free of, and is seen to be free of, manipulation.
- Primary dealers are required to maintain a certain level of activity on primary and secondary markets and to bid at a certain level at auction (in terms of both bidding limit and reasonableness of that bid), as well as to fulfill net position reporting requirements.
Relation between the size of public debt and the desirability of PDAs government marketable debt declines, it becomes more important to maintain a system of primary dealers to ensure a well-functioning market for the Government of Canada securities.
Recommendation of PD systemStrongly recommended. A system of PDs is advisable in all stages of development.
Advantages- Ensures a minimum level and quality of coverage at auction regardless of market conditions.
- Maximum auction limit and net position reporting act to prevent most squeezes.
- Market-making responsibilities enhance the liquidity and proper functioning of the Government of Canada securities market.
DisadvantagesRequires regular measuring and monitoring to ensure compliance with 1998 rules (see above).
Chile
Dealers in government securities67 (30 banks, 8 pension funds, 27 insurance companies, and 2 mutual funds).
PD institutionsNo PD system.
System evolution over timeThe decision for not having established a PD system was basically for the following reasons:
(1) Pension funds (AFP) and insurance companies can participate in the primary market of debt instruments auctions, but their own rules do not allow them to actively participate in the development of the secondary market. Establishing a PD system would imply leaving these institutions out of the primary market or of our debt instruments.
(2) Due to the characteristics of the banks, a PD system and its demands would allow that only four or seven banks would be able to fulfill them, and therefore we would depend only on a limited number of institutions with similar objectives and collusion risk.
Relation between the size of public debt and the desirability of PDNo, due to the number of institutions that participate in debt instrument auctions and to the different nature of their functions (banks, AFPs, insurance companies, and mutual funds).
Recommendation of PD systemShould the conditions be favorable for the functioning of a PD system, it might be convenient to apply it at the beginning of economic and financial development, to encourage the participation of the institutions that can carry out such work, fostering the development of secondary markets and obtaining standard information on prices, volume, participation, etc.
AdvantagesBetter information and development of secondary markets, more net and deeper for our debt instruments.
DisadvantagesLeaving AFP and insurance companies out of the debt auctions; dependence on a small number of institutions that can fulfill PD demands.
Czech Republic
Dealers in government securitiesTotal number of licensed securities dealers is 107.
System established1997.
PD institutions12 PDs for government bonds and 13 PDs for treasury bills. These PDs are commercial and investment banks, and brokers.
Selection criteriaMinimum capital; involvement in government securities market; and minimum obligations on government bonds and treasury bills.
PD obligationsObligation to bid in the auctions, to report to the central bank, to quote firm; to quarterly underwrite a certain amount of government bonds; and to order a certain amount of treasury bills per quarter.
PrivilegesExclusive access to primary auctions.
Supervision and enforcementCentral bank.
Formal agreementYes, “The Rules for a Primary Sale of Government Bonds” and “The Rules for a Primary Sale of Treasury Bills.”
Revision of statusQuarterly.
System evolution over timeThe number and names of PDs have stabilized; the trading amount has increased; the fees for taking orders from non-PDs have evaporated. Due to liquidity and suitable underlying policies, the other segments of the government securities market have developed and have become more liquid.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemStrongly recommended at the early development stage. At first, the system provides development of a stable demand for government securities and establishment of a market allowing them to be traded and later a choice of market makers who would be suitable candidates to become PDs.
AdvantagesStable structure of counterparties; easier administration and communication with market; transparent and reliable channel for cash and securities distribution; higher probability to sell securities.
DisadvantagesUnder certain conditions, other investors might be penalized for not being PDs by possibly incurring higher prices for using the PD as an intermediary. But it depends on the level of development of the market and the level of competition.
Finland
Dealers in government securities10–20.
System established1992.
PD institutions10 primary dealers composed of commercial and investment banks, and foreign institutions.
Selection criteriaMinimum capital, involvement in government securities market, and long-term commitment to dealing in this market.
PD obligationsTo bid in the auctions, to quote firm and two ways, to report to the central bank, and to sponsor the Finnish debt.
PrivilegesExclusive access to primary auctions, repo facility from State Treasury.
Supervision and enforcementState Treasury.
Formal agreementA binding agreement, similar to a memorandum of understanding.
Revision of statusWhen necessary.
System evolution over timeFrom domestic market, change to euro market and more offshore international PDs.
Relation between the size of public debt and the desirability of PDYes, decreasing debt, but does not change business for many dealers.
Recommendation of PD systemStrongly recommended at the early development stage. In Finland’s case, helped to build and develop the debt market.
AdvantagesCommitted sales force, research, distribution of government debt.
DisadvantagesNA.
France
Dealers in government securitiesMore than 40.
System established1987.
PD institutions18 investment banks.
Selection criteriaMinimum capital and involvement in government securities market.
PD obligationsObligations to bid in the auctions, to quote firm and two ways, to report to Treasury in an advisory role, and to promote sales of debt securities.
PrivilegesRegular meeting with the Treasury; most frequent but not exclusive dealer with Treasury.
Supervision and enforcementMinistry of Finance.
Formal agreementGeneral framework of their activities.
Revision of statusEvery two years.
System evolution over timeThe composition, quality, and number of PDs have changed with the market. The group is now more international and includes larger banks.
Relation between the size of public debt and the desirability of PDNo, the desirability of primary dealers depends less on the size of the public debt and more on its permanence.
Recommendation of PD systemStrongly recommended at the early or middle development stage. The existence and interest of a PD group depends on the stability, size, and constancy of a tradable debt. It is clear that even at an early development stage, to get advice and liquidity brought by several market makers on a foreign or local debt is useful. Still, it is not always easy to find banks ready to become PDs, particularly if the debt is too volatile.
AdvantagesDecreasing market and refinancing risk, knowledge of the market, capacity of innovation, access to a wider sales force, and better promotion of the debt.
DisadvantagesNone.
Germany
PD institutionsNo primary dealer system.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemNot recommended. The German authorities consider the present auction system as very effective. Due to the active trading of government securities at the stock exchange and on the electronic systems, there is no need for a PD system.
AdvantagesNA.
DisadvantagesNA.
Ghana
Dealers in government securities26.
System established1996.
PD institutions26 primary dealers composed of commercial and investment banks, and brokers.
Selection criteriaInvolvement in government securities market; must be dealers on the Ghana Stock Exchange in the case of brokerage firms; and must be a deposit money bank (DMB) having a reserve requirement to meet.
PD obligationsTo bid in the auctions, to quote firm, and to report to the central bank. For banks acting as PDs, they must hold a specified percentage of their deposits in government securities to meet the secondary reserve requirement.
PrivilegesExclusive access to primary auctions, and exclusive counterparty for central bank’s open market operations.
Supervision and enforcementCentral bank and Securities Regulatory Commission.
Formal agreementYes. First, brokerage firms have to be interviewed and licensed to operate as a PD. Second, DMBs are granted automatic dealership to meet their secondary reserve requirement. Third, new banks and discount houses have to apply for and be granted PD status.
Revision of statusAnnually and when a PD is absent from the auction on three consecutive occasions.
System evolution over timeThe number of PDs and their stock of holdings have increased since being established in 1996. The government securities market is now better organized under a book-entry system ensuring delivery versus payment and allowing for secondary market activities; for example, transfers, pledging as collaterals, repos, outright sales, and similar actions.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemRecommended at the middle development stage. The basic infrastructure, regulations, code of conduct, and sound practices must be in place for the effective operation of the PD system.
Advantages- Maximum participation in the auction is ensured.
- The market is relatively more competitive.
- The PD system makes possible a relatively vibrant secondary market.
Disadvantages- PDs can consolidate and influence the market.
- The banks, as PDs, have products that are in competition with government securities and their commitment cannot be guaranteed.
Greece
Dealers in government securities38.
System established1998.
PD institutions15 PDs composed of commercial and investment banks, and foreign institutions.
Selection criteriaMinimum capital and involvement in government securities market.
PD obligationsTo bid in the auctions and to quote two ways.
PrivilegesExclusive access to primary auctions and on liability management.
Supervision and enforcementCentral bank, Ministry of Finance, and Public Debt Management Agency.
Formal agreementA committee formulated the Operating Rules of the Primary Dealer System and by law they are to be approved by the Ministry of Finance and the Governor of the Bank of Greece.
Revision of statusAnnually.
System evolution over timeStarted in 1998 with 12 PDs; increased to 15 in 2001 (5 locals, 10 foreigners).
Relation between the size of public debt and the desirability of PDYes, we wish to have a very strong and small group of PDs.
Recommendation of PD systemStrongly recommended at the early development stage. At that point, there is an organized market. Also, PDs add liquidity and transparency to the market, and they have far greater control over the issue of the banks.
AdvantagesNA.
DisadvantagesNA.
Hungary
Dealers in government securities13.
System establishedJanuary 1996.
PD institutions13 primary dealers composed of commercial and investment banks, and brokers.
Selection criteriaMinimum capital; involvement in government securities market; and right to trade at Budapest stock exchange.
PD obligationsObligation to bid in the auctions; to quote firm and two ways; to report to the Government Debt Management Agency.
PrivilegesExclusive access to primary auctions; information and consultation with the Government Debt Management Agency.
Supervision and enforcementGovernment Debt Management Agency.
Formal agreementYes, standardized.
Revision of statusSemiannually.
System evolution over timeThe number of participants has decreased from 21 to 13; requirements have become stricter and higher; dealers are typically stronger market performers; the compulsory minimum level of the market activity has become higher; there are more and more banks involved.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of systemRecommended at the early development stage.
AdvantagesSecured base for sale of government securities, supporting the secondary market of government securities, and direct connection to and information exchange with market performers.
DisadvantagesThe free competition is limited in a way, and part of the debt financing depends on the performance of a limited number of market traders.
Iceland
Dealers in government securitiesAbout 10.
System establishedMay 2002.
PD institutions5 commercial banks.
Selection criteriaMinimum capital and involvement in government securities market.
PD obligationsTo bid in the auctions and to quote term in and two ways on the ICEX.
PrivilegesExclusive access to primary auctions.
Supervision and enforcementCentral bank and National Debt Management Agency (NDMA).
Formal agreementYes, the NDMA takes full care of the system.
Revision of statusAnnually.
System evolution over timeThe system has operated well.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemStrongly recommended at the early development stage. Middle development in small economy with few players.
AdvantagesFour market makers are now, together with PDs, obligated to take part in auctions and to give two-way quotes within a determined range. This leads to a better market price, increased price formation in the secondary market, and enhances the treasury’s access to the market. Turnover in the secondary market has increased.
DisadvantagesNone so far.
India
Dealers in government securities18 primary dealers apart from banks.
System established1996.
PD institutions18 PDs set up as subsidiaries of scheduled commercial banks (both domestic and foreign) and financial institutions or as companies incorporated under the Indian Companies Act. They are registered as nonbanking finance companies within the supervisory and regulatory purview of the central bank.
Selection criteriaMinimum capital and involvement in government securities, track record, management, and technical expertise.
PD obligationsObligation to bid in the auctions, fulfill minimum bidding commitment, achieve a minimum success ratio for dated securities and treasury bills, offer firm two-way quotes; achieve a minimum turnover in government securities.
PrivilegesAccess to banking facilities with the central bank, exclusive borrowing privileges with the central bank; access to the call money/repo market, receipt of underwriting commission.
Supervision and enforcementThe operations of the PDs are monitored by the central bank under the overall supervision of the Board for Financial Supervision. PDs are also governed by the laws/rules and regulations of the Securities and Exchange Board of India (SEBI) when the government securities are traded on the exchanges and Department of Company Affairs, Government of India. PD registered as investment banks/stockbrokers are also supervised/regulated by SEBI for these activities.
Formal agreementYes, the agreement outlines the bidding commitments, minimum success ratio in the auctions, and other terms and conditions such as obligation to offer firm two-way quotes for select stocks.
System evolution over timeThe number of PDs has gone up from 6 to 18. The benefits of the PD system are evident in the growing market turnover for government securities, increasing market absorption of government securities.
Relation between the size of public debt and the desirability of PDYes, as the size of government debt has been growing, an increase in the number of PDs would enhance the absorption of government securities.
Recommendation of PD systemIn the early stage, PDs should be allowed in the primary market along with the central bank, with certain privileges including borrowing facilities from the central bank. This is in order to develop and nurture the institutional framework. In the second stage, PDs could be allowed exclusive participation in the primary market, by removing all other privileges. Finally, in the third stage, PDs could be made exclusive conduits for the central bank’s open market operations.
AdvantagesUnderwriting and market-making abilities exclusively in the government securities market will be developed; improved liquidity for government securities; open market operations could be effective and operationally simpler once PDs become exclusive counterparties for the central bank’s open market operations.
DisadvantagesPDs depend highly on short-term funding and call money market. However, the central bank is developing the repo market, which could serve as the main source of funds for PDs.
Indonesia
Dealers in government securitiesSo far, there are no dealers for government securities, just 14 brokers (7 brokers for capital markets and 7 brokers for money markets). However, these brokers are only for the central bank securities transactions called Sertifikat Bank Indonesia (SBI).
PD institutionsNo PD system.
System evolution over timeIn 1993, primary dealers were needed to help develop the SBI secondary market. As the SBI secondary market developed, the PD system was seen as unnecessary and therefore discontinued in 1998. Access to SBI was then opened to all market participants, i.e., banks, brokers, and individuals. The new regulation on SBI auction, which became effective in October 2002, states that only banks and brokers have access to the SBI primary market.
Relation between the size of public debt and the desirability of PDThe need for primary dealers may become imminent should the government issue treasury bills and government bonds under the new Government Securities Law passed by the Parliament in September 2002. Currently, the only existing government bonds are recapitalization bonds issued to finance the cost of the government’s financial participation in commercial banks as part of the national program to restructure and revitalize the banking sector. Recapitalization bonds were issued through private placements.
Recommendation of PD systemStrongly recommended at Indonesia’s current development stage, i.e., the middle stage. The growth of Indonesia’s equity and debt market and the passage of the Government Securities Law will make the need for a PD system imminent. Market-supporting infrastructure has also been developed. Indonesia already owns two stock exchanges, i.e., the Jakarta Stock Exchange and the Surabaya Stock Exchange, a fund transfer system called the Real-Time Gross Settlement (BI-RTGS), and a Government Bond Settlement System called BI-SKRIP. Both the BI-RTGS and the BI-SKRIP are operated by the central bank, Bank of Indonesia. Based on this infrastructure and a Scripless Securities Settlement System currently being developed by Bank Indonesia, the Ministry of Finance and Bank Indonesia are developing a secondary market for government securities.
AdvantagesPDs can develop a secondary market for government bonds and create market liquidity.
DisadvantagesA minor disadvantage might be that with primary dealers, the price of a trade might not reflect the market price, so not many participants would do securities transactions. The price seems determined only by primary dealers.
Ireland
Dealers in government securities7 in addition to the primary dealers, which account for 95 percent of market turnover; no agency, only brokers are authorized to deal in Irish government bonds in the Irish stock exchange. A number of foreign banks also quote.
System established1995.
PD institutions7 commercial and investment banks, brokers, and foreign institutions.
Selection criteriaMinimum capital, involvement in government securities market, and ability to distribute Irish government bonds.
PD obligationsTo bid in the auctions, to quote firm and two ways, and to report to the National Treasury Management Agency (NTMA).
PrivilegesExclusive access to primary auctions, exclusive counterparty for NTMA repos and reverse repos, bond-switching facilities, and bid of last resort to PD.
Supervision and enforcementNTMA, which is the debt manager of the Ministry of Finance and the Irish Stock Exchange.
Formal agreementMemorandum of understanding.
Revision of statusNewly recognized PD after one year, thereafter at variable periods of two or three years.
System evolution over timeSince the introduction of the euro on January 1, 1999, the PD system has become more important for the successful marketing of Irish government bonds to nonresidents within the euro area.
Relation between the size of public debt and the desirability of PDNo close relationship, but a number of benchmark bonds of seasonable size (EUR 3 to 5 million) are required to provide sufficient liquidity for a viable market.
Recommendation of PD systemStrongly recommended at the advanced development stage. A viable PD system requires a fully developed liquid capital market with a government yield curve out to at least 10 years.
AdvantagesPDs reduce the cost of borrowing by providing a continuous two-way liquid market in government bonds; create certainty in the secondary market; eliminate illiquidity premium cost; allow debt to be restructured; act as sounding board for changing debt strategy; and facilitate closer organized contact with the investors.
DisadvantagesRecognition of commercial pressures that the PDs face.
Italy
Dealers in government securities120.
System established1994.
PD institutions16 primary dealers or “specialists” including commercial and investment banks, and foreign institutions.
Selection criteriaMinimum capital, involvement in government securities market, and suitable organization to obtain a widespread and efficient placement of securities.
PD obligationsObligation to bid in the auctions, to quote two ways, and on the secondary market consideration given only to proposals for a minimum of five hours per working day. Besides the bid-ask spread, the performance is also evaluated in terms of number of securities traded and quoted, total amount exchanged, and applications received.
PrivilegesExclusive access to noncompetitive taps, within 10 percent of the total amount offered by the Treasury in the auction. Faculty to participate, in an exclusive way, in buyback operations drawn on the “ad hoc” Government Sinking Fund.
Supervision and enforcementMinistry of Finance.
Formal agreementYes. A document published by the Treasury specifying the obligations and privileges of the specialists.
Revision of statusEvery two years.
System evolution over timeEstablished in 1994, the number of specialists has developed over time. During the same period, the evaluation criteria have been modified to better monitor their performance, stimulate their activity on strip and repo markets, and give rise to a stronger virtual competition among them. Imposing requirements that are perceived to be too stringent by market participants can create an incentive to formally comply with the requirements but without any positive impact on the efficiency of the market. For instance, requiring a secondary market share of 2 percent could lead to “whipped cream,” or a transaction between two PDs to reach the requested quota.
Relation between the size of public debt and the desirability of PDYes, the PD system is a guarantee for the Treasury that numerous and frequent auctions of significant sizes are always fully covered and that the potential liquidity of bonds becomes fully realized.
Recommendation of PD systemStrongly recommended. At the early stages of development, a country needs to issue public debt in order to set up all the basic infrastructures to start any economic development process. A PD system may help to raise those financial resources that the market would be reluctant to grant otherwise. At the middle development stage, PDs can support the sovereign issuer to find domestic and foreign final investors interested in holding the country paper even at some additional cost. Moreover, PDs are able to support the public debt manager in drafting the entire debt management policy and designing suitable debt instruments. At an advanced development stage, PDs become essential to developing a liquid and active secondary market that can help lower the cost of funding, stabilizing the investors’ demand and widening the base of investors. At the same time, PDs continue to address the role of financial consultant, especially as far as the issuance policy is concerned.
Advantages- Full and constant coverage of auctions;
- Better knowledge of market conditions to improve the issuance strategy by reducing the cost of funding and controlling financial risk;
- Higher liquidity of bonds on the secondary market;
- Availability of a skillful advisory support in building and following the debt management policy;
- Possibility of being put in contact with a much higher number of investors in order to capture at any moment convenient issuance opportunities; and
- Availability of a competent support in designing market-tailored securities.
DisadvantagesRisk for the debt management policy of being sometimes influenced by views that are more biased toward PDs’ own interests than toward those of the sovereign issuer.
Kazakhstan
Dealers in government securities118.
System established1994.
PD institutions16 primary dealers composed of commercial and investment banks, and foreign institutions.
Selection criteriaMinimum capital and involvement in government securities market.
PD obligationsObligations to quote firm; to report to the central bank; and to be in “normal” position (for Kazakhstan) regarding prudential norms.
PrivilegesExclusive access to primary auctions.
Supervision and enforcementMinistry of Finance and National Security Commission.
Formal agreementYes, including limitation of firm quotes.
Revision of statusAnnually.
System evolution over timeSystem is changing according to primary and secondary market; if inflation process is stable, primary dealers prefer to trade securities in national currency; if unstable they prefer securities that are denominated in U.S. dollars or eurobonds.
Relation between the size of public debt and the desirability of PDNone.
Recommendation of PD systemSystem recommended at the early development stage. Without a PD system it will be hard to have stability in primary market.
AdvantagesIt is easy to control and systemize primary market.
DisadvantagesNo serious disadvantages of having a PD system.
Kenya
PD institutionsNo PD system.
System evolution over timeThe preparation of a policy paper on the regulation of the wholesale market for government securities as a way of deepening the market is currently under way.
Relation between the size of public debt and the desirability of PDYes, when there is need to promote a market-oriented economy with a view to reducing the cost of government borrowing.
Recommendation of PD systemStrongly recommended at all development stages. PDs play a useful role in the transition from a planned economy to a market-oriented one, owing to their expertise and financial capabilities. At an advanced stage of development, when selecting trading counterparties in execution of monetary policy, PDs are also useful. However, highly reliable and efficient automated operating and communication systems are absolutely necessary.
AdvantagesProvides a smooth transition from a direct to a fully market-based system; produces increased efficiency in the auction process and open market operations; provides secure maximum participation in auction of government securities; improves functioning of primary markets and terms of government borrowing; enhances liquidity in the secondary market; brings about greater competition and leads to cheaper dealing costs in the secondary market.
DisadvantagesCollusion may occur where only few firms are accepted as PDs, leading to lower auction prices and high intermediation costs passed on to the end investors.
Korea
Dealers in government securities102.
System establishedJuly 1997.
PD institutions26 primary dealers composed of commercial banks, brokers, foreign institutions, and merchant banks.
Selection criteriaMinimum capital and involvement in government securities market.
PD obligationsObligation to bid in the auctions; to quote two ways; and to trade a minimum of 2 percent of total secondary market volume.
PrivilegesExclusive access to primary auctions and noncompetitive bidding.
Supervision and enforcementMinistry of Finance and Korea Stock Exchange (maintaining inter-dealer market).
Formal agreementYes, a memorandum of understanding between the Ministry of Finance and PDs.
Revision of statusAnnually.
System evolution over timeThe PD system has contributed to the development of a domestic bond market in both primary and secondary markets.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemStrongly recommended at the early development stage. The role of government in developing a bond market reaches its highest point when the development stage is the middle stage. When the financial market deepens, the power of the market itself can take the role efficiently.
AdvantagesReduces the cost of government bond issues because a government does not have to pay; lowers underwriting fees; strengthens the demand base of the government bond and the stability of the bond market by establishing leading market makers.
DisadvantagesNothing particular.
Latvia
Dealers in government securities15 banks and 7 brokerage companies are licensed for intermediation in the securities markets. In the primary market of government securities all domestic banks (22 banks) and foreign financial institutions that have accounts (in lats) with the central bank (2 foreign banks) can participate.
PD institutionsNo PD system.
System evolution over timeIt has been discussed. The Latvian market is too small for a PD system, and banks prefer no obligations in the government securities market.
Relation between the size of public debt and the desirability of PDNo, the driving force for primary dealers could be competition in the market, not the size of public debt in Latvia.
Recommendation of PD systemNot recommended. A PD system demands adequate market structure, including some sizable players and many smaller ones; then a PD system helps to organize the financial system. In early development, this banking structure may not exist. Therefore, a PD system might be appropriate only at an advanced stage of financial development.
AdvantagesProvides increase in liquidity and reduction in margins.
DisadvantagesPrimary dealers should hold a broad range of government securities constantly and are forced to participate in every auction of the primary market.
Mauritius
Dealers in government securitiesApproximately 40.
PD institutionsNo PD system.
System evolution over timeThe authorities have been discussing the possible establishment of a PD system in order to develop secondary market trading, which will be instrumental in implementing monetary policy decisions. The next priority of the Bank of Mauritius is to establish a PD system in government securities as early as possible.
Relation between the size of public debt and the desirability of PDThe volume of transactions and efficiency of the secondary market would influence the appointment of primary dealers.
Recommendation of PD systemRecommended at the middle development stage. Objectives of debt management would have been established. Information on the demand for securities and market structure would be available. Information on the macroeconomic environment would be available.
AdvantagesA PD system activates the secondary market for treasury bills; it also enables buyers and sellers to transact efficiently at prices reflecting fair values.
DisadvantagesPDs may buy securities with attractive yields and hold them instead of trading them.
Mexico
Dealers in government securitiesCommercial banks, development banks, and brokerage houses can deal with government securities, although not all of them are active in the market. Currently, there are between 20 and 25 institutions that are active in this market.
System establishedOctober 2000.
PD institutions5 PDs composed of commercial banks and brokerage houses (casas de bolsa) that trade with securities; investment banks are not involved.
Selection criteriaInvolvement in government securities market. Only five institutions can be primary dealers, and they are named for a period of six months. At the conclusion of that period, the institutions are selected again. A new institution has to become one of the primary dealers, replacing an existing one. Institutions compete to be market makers based on their activity in the nominal fixed-rate government securities market. The activity is measured based on a publicly known index, which takes into account their activity in the primary market, in the interbank market, and with their clients. The five institutions that show the highest index are selected as primary dealers. As mentioned above, if these institutions are the same as the ones in the previous period, the lowest-scoring one has to be replaced by the one finishing in the sixth place that was not a primary dealer.
PD obligationsObligation to bid in the auctions; to quote two ways; and to report to the central bank.
PrivilegesBorrowing privileges with the central bank. Also access to a “green shoe” facility where as a group, PDs can acquire up to an additional 20 percent of the fixed-rate securities offered in the primary auction at the average price that resulted in the auction. However, a prerequisite to access to the facility is to have won part of the primary auction.
Supervision and enforcementMinistry of Finance and the central bank.
Formal agreementYes, rules to become and to compete to be a primary dealer were set by the Ministry of Finance and published by the central bank. To compete to be a primary dealer, institutions have to send a letter to the Ministry of Finance specifying their intentions to do so. In that letter, they agree to send all information required for the measurement of the index and to comply with the rules that apply for calculating it.
Revision of statusSemiannually.
System evolution over timeAlthough it was adopted very recently, the experience has been very positive. Particularly, liquidity in the interbank market for nominal fixed-rate securities has increased substantially.
Relation between the size of public debt and the desirability of PDNo, currently the primary dealer figure works only for nominal fixed-rate debt (treasury bills and bonds). These securities represent only around 35 percent of total government debt. To date, there has been a great deal of interest in becoming a primary dealer.
Recommendation of PD systemStrongly recommended at the middle development stage. It is a good way to give impetus to the market, which should have as a prerequisite a good infrastructure and certain liquidity.
AdvantagesThe increase in liquidity that PDs offer to the market.
DisadvantagesIf obligations and benefits are not set correctly, the ranking index could give a competitive advantage to some intermediaries over others.
Morocco
Dealers in government securitiesThe central bank, 18 credit institutions, one broker-dealer (CDG), 103 mutual funds.
System establishedAugust 1995.
PD institutions7 commercial banks, a CDG, an intermediation bank (MEDIAFINANCE).
Selection criteriaInvolvement in government securities market, subscription volume on primary market, and volume traded on secondary market (10 percent).
PD obligationsObligations to bid in the auctions and to quote firm and two ways.
PrivilegesPossibility to have noncompetitive bids up to 20 percent of the weighted average withholding volume.
Supervision and enforcementCentral bank and Ministry of Finance.
Formal agreementConvention between the Treasury and primary dealers (I.V.T.), which describes the obligations of the parties.
Revision of statusNA.
System evolution over timeNA.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemRecommended at the early development stage.
AdvantagesOrganization of the bond market, promotion of treasury bills, exchange of information on available bids as well as the price levels at which the investors are willing to subscribe.
DisadvantagesNA.
Netherlands
Dealers in government securitiesDozens.
System establishedJanuary 1, 1999.
PD institutions13 institutions, including commercial and investment banks, and foreign institutions.
Selection criteriaMinimum capital, involvement in government securities market, and geographical distribution of their turnover, promotion activities, commitment.
PD obligationsObligation to bid in the auctions, to quote firm and two ways, and to report secondary market turnover to the Dutch State Treasury Agency (DSTA), to act in the interest of the DSTA, and to participate in research.
PrivilegesExclusive access to primary auctions. PDs may use the title primary dealer for Dutch State Loans. The obligation of two-way quoting (market making) applies to PDs only. It is increasingly considered a privilege by both PDs and nonprimary dealers.
Supervision and enforcementMinistry of Finance.
Formal agreementYes. In October of each year, a selection process is begun by which 13 PDs are selected for the 12-month period beginning January 1. Existing PDs, as well as banks that want to become PDs, submit a business plan regarding Dutch State Loans. Based on these business plans, the DSTA selects 13 dealers with whom a 12-month contract is signed.
Revision of statusAnnually.
System evolution over timeOur system was established relatively recently. Our experience has been that the system has helped in attaining our objectives of supporting liquidity and promoting broad geographical coverage.
Relation between the size of public debt and the desirability of PDA PD system seems desirable and feasible only if a state has a sufficient volume of issues, at least a few billion euros per year.
Recommendation of PD systemStrongly recommended at the middle or advanced development stage. The question is difficult to answer. One of the elements that triggered the establishment of the PD system in the Netherlands was the introduction of the euro. Instead of being the largest issuer in the guilder market, the Dutch State became one of the four AAA-rated issuers in the euro area. Given this more competitive environment, a privileged relationship with a core group of local, regional, and global banks was deemed desirable. Drawing general conclusions from this experience and applying them to countries differentiated by their level of development is fraught with difficulties. For one, the development of the capital market seems equally as important as the level of economic development. It seems fair to assume that a PD system can perform several functions for a sovereign issuer. As long as the sovereign’s debt management agency is competent and knows what it wants from the PD, it seems right to assume that a PD system can be used at all stages of development. A positive aspect of PD systems may be that they help develop local capital markets in emerging economies, in the sense of obliging local banks to actively develop their sales to final investors.
AdvantagesProduces a core group of banks that compete to buy the issuer’s bonds; provides information on market movements and trends.
DisadvantagesSo far none.
New Zealand
Dealers in government securitiesThere are six to eight market makers in government securities. There are no primary dealers.
Recommendation of PD systemPrimary dealers are not a feature of the New Zealand government securities market. New Zealand has not found it necessary to introduce primary dealers or officially appointed market makers to assist with the distribution of securities. Instead, the New Zealand Debt Management Office (NZDMO) considers that a better outcome is market making in government securities based on commercial decisions by market participants themselves. All market participants, including end investors, may bid in auctions, subject to criteria related to creditworthiness, as assessed by the Reserve Bank of New Zealand (RBNZ). In addition, membership in Austraclear, the real-time securities and high-value payments settlement system, is effectively an acceptance criterion, as auction bidding is conducted via Austraclear’s electronic tendering facility. The current arrangement has worked well, with a core group of six to eight market makers at any one time.
Norway
Dealers in government securities7+.
System established1995.
PD institutions6 commercial banks and brokers.
Selection criteriaInvolvement in government securities market.
PD obligationsObligation to quote firm and two ways, and to report to the central bank.
PrivilegesBorrowing privileges with central bank.
Supervision and enforcementCentral bank.
Formal agreementYes, agreement in writing.
Revision of statusAnnually.
System evolution over timeNA.
Relation between the size of public debt and the desirability of PDYes.
Recommendation of PD systemRecommended at the middle development stage.
AdvantagesWith two-way quotes, the market always has price information and better liquidity.
DisadvantagesThe central bank must provide some privileges to the PD.
Poland
Dealers in government securitiesIt depends on type of instrument: treasury bills—38; treasury bonds—about 12 on average.
PD institutionsNo PD system.
System evolution over timeThere has never been a PD system in Poland. The problem had been under discussion for more than five years when the Polish Central Bank decided to establish the Money Market Dealer System for money policy purposes. For the last two years, the Polish investor base has developed significantly: creation of a pension funds system and privatization of certain banks. Foreign banks are also providing sizable activity. From the point of view of public debt management, many changes took place in the structure of debt: an increase in marketable bonds, particularly fixed-rate bonds and a decrease in treasury bills and nonmarketable instruments. Thanks to these changes, the market of treasury bonds has become deeper and more liquid but still nontransparent. These have been the most important elements in supporting the decision to not establish a PD system.
Relation between the size of public debt and the desirability of PDYes. It is much easier to build a liquid debt market in the environment of large size of public debt, because only a sufficient amount of debt stock enables constant trading in securities. Consequently, it is easier to establish a PD system. PDs have obligations to develop and maintain liquidity. They have also to ensure the transparency of the market, an important consideration for investors.
Recommendation of PD systemStrongly recommended at the middle and/or advanced development stage. Only in these cases do the advantages of PDs outweigh the disadvantages. In the case of establishing a system in the early stages of development, there are different obstacles to having a profitable system:
- the depth of the market is insufficient;
- investor base is weak;
- there is generally an inadequate structure (excess of nonmarketable instruments) of debt and the value of debt;
- level of competitiveness among participants in the market is undeveloped;
- settlement system should be developed and liquid (a suitable Real-Time Gross Settlement should be in place);
That is why it is difficult to recommend a PD system, particularly in the first two cases.
AdvantagesThere are several advantages, including
- reliability of financing state budget needs, even in a single-currency environment;
- liquidity and transparency of the government securities market;
- cost-effective financing; and
- the exchange of information about market and issuer policy.
DisadvantagesThe danger of collusion when there are mainly:
- fusion of banks in globalized environment; and
- lack of competitiveness.
Portugal
Dealers in government securities25.
System established1998.
PD institutions13 commercial and investment banks, and foreign institutions.
Selection criteriaInvolvement in government securities market and Regulation No. 1/2001, Art. 6 and 16:
- capacity for subscription and placement of bonds in the competitive phase of auctions;
- participate, in a regular and significant way, in the bond secondary market;
- offer guarantees for the physical and financial settlement of bonds; and
- produce a statement signed by the dealer’s Board of Directors, in which the dealer pledges to obey the rules of the Regulation.
PD obligationsObligation to quote firm and two ways. Regulation No. 1/2001, Art. 18, also requires dealers to
- bid regularly under normal market conditions and subscribe to a share not lower than 2 percent of the amount placed at the competitive phase of the auctions;
- participate actively in the secondary market, ensuring liquidity;
- participate in the secondary market (MEDIP) as market maker, with no less than 2 percent market’s turnover share;
- keep a permanently updated page showing quotations for liquid treasury bonds in a specialized remote information system of widespread dissemination;
- supply the information required for the monitoring of their activity in the secondary market and check compliance with the provisions of this regulation;
- respect all rules adopted by the Institute for Public Debt Management (IGCP) regarding the scope and object of the regulation;
- operate as privileged consultants to the IGCP in the monitoring of financial markets; and
- duly inform IGCP as to their difficulty in performing some of the duties, namely in case of anomalous or extraordinary market conditions, and await the IGCP’s consent of the change in the form of compliance, or of noncompliance, with any of the duties.
PrivilegesRegulation No. 1/2001, Art. 17: specialized primary dealers have a right to
- exclusive access to the noncompetitive phase of bond auctions;
- preference in syndicates and in other forms of placing government debt;
- access to IGCP facilities to support the market, namely the repo window;
- preference in carrying out transactions related to management of public debt; and
- privileged hearing in matters of common interest.
Supervision and enforcementIGCP.
Formal agreementRegulation No. 1/2001 made by the IGCP.
Revision of statusAnnually.
System evolution over timeThe PD system started in 1998 with six domestic and six foreign PDs. Beginning in 1999, the number of foreign institutions gradually increased to nine, while the number of domestic PDs fell to four mostly as a result of mergers among banks. The increase in the number of foreign PDs was accompanied by a sharp rise in the percentage of debt placed with foreign investors (83 percent of debt issued in 2000 was placed with foreign investors).
Relation between the size of public debt and the desirability of PDNo. It is difficult to define the optimal number of PDs for each market, although in theory, the larger the market the larger the number of PDs.
Recommendation of PD systemStrongly recommended at the middle and/or advanced development stage. The PD system is a very important tool in developing an efficient, fixed interest rate domestic secondary market, which implies a sound macroeconomic situation and a developed financial system.
AdvantagesProvides access to a permanent distribution channel of both domestic and international debt; opens up a permanent secondary market; and gives more visibility with final investors (especially foreign ones).
DisadvantagesNA.
Saudi Arabia
PD institutionsNo PD system.
System evolution over timeThe idea is being considered by the authorities but it needs further assessment.
Relation between the size of public debt and the desirability of PDYes, for efficiency and liquidity reasons, the need for a PD increases as the size of the debt becomes larger.
Recommendation of PD systemRecommended at the middle and/or advanced development stage. As the size of the economy and the capital market become larger, the need for PD and the benefit from such a system increase.
AdvantagesTo enhance market efficiency and liquidity along with creating an active secondary market.
DisadvantagesPossible manipulation of prices if the size of the capital market is small and/or if regulatory guidelines are not sufficient to ensure fair play.
Singapore
Dealers in government securities31.
System established1987.
PD institutions11 commercial banks.
Selection criteriaInvolvement in government securities market, minimum credit rating of B/C by KBW/IBCA, staffing requirements of at least two dealers with experience in fixed-income trading, and track record in other developed bond markets.
PD obligationsObligation to bid in the auctions, to report to the central bank, to provide liquidity in the Singapore government securities (SGS) outright and repo markets by quoting two ways, to participate in SGS auctions and underwrite issuance, to give feedback to the Monetary Authority of Singapore (MAS), to assist market development, to help fix interbank rates, and to provide closing prices.
PrivilegesExclusive access to primary auctions and counterparty for central bank’s open market operations, tax exemption on SGS trading income. Only PDs can bid for SGS at auctions. MAS holds regular meetings with the PDs to discuss market issues. MAS conducts money market operations through PDs only. Access to the MAS repo facility, which enables PDs with short positions to bid for specific SGS issues offered by MAS in exchange for other SGS issues they have. This facilitates PD market-making activities.
Supervision and enforcementCentral bank.
Formal agreementYes, candidates need to apply to the MAS to become a PD. Upon receiving MAS’s approval, applicant is required to submit a formal letter accepting responsibilities and requirements of a PD.
Revision of statusMAS conducts a semiannual PD evaluation and ranking exercise.
System evolution over timeMAS started its PD system with seven PDs in 1987 with an outstanding amount of SGS of $4.46 billion. Since then, the amount of SGS outstanding has increased more than ninefold to $43.2 billion as of end-2001. This has been accompanied by an increase to 11 PDs at end-February 2001. Since 1997, MAS has been undertaking a series of market measures in consultation with PDs to improve market efficiency and liquidity. These include conducting SGS purchase operations to rechannel liquidity from illiquid off-the-run issues into the benchmark issues and building larger benchmark issues. At the same time, MAS also strengthened incentives that are given to PDs. Money market operations are conducted only with PDs, and the repo facility was implemented to facilitate their activities.
Relation between the size of public debt and the desirability of PDYes, see reply on advantages.
Recommendation of PD systemRecommended at the early or middle development stage. Should the bond market investor base eventually become well diversified and achieve critical mass, the need for a PD system becomes less severe.
AdvantagesPDs play a critical role in facilitating the growth and development of a young bond market with a small and limited investor base, for the following reasons:
- having a group of PDs committed to making two-way prices helps provide a minimum level of liquidity that attracts investors into the market;
- foreign PDs, key participants in developed bond markets, bring knowledge and expertise, which help speed the development of the bond market; and
- foreign PDs with a global client base would be committed to attracting their investor clients to the developing bond market.
DisadvantagesIn a system where PDs receive privileges to fulfill their obligations, this could create an uneven playing field vis-à-vis non-PD market participants.
Spain
Dealers in government securities146 and 21 primary dealers.
System establishedJanuary 1988.
PD institutions21 PDs, composed of domestic and foreign commercial and investment banks.
Selection criteriaTechnical criteria as well as membership of the Spanish debt market, with a strong commitment to its development.
PD obligationsAuction bidding obligations, firm two-way quoting commitment subject to oversight, and must provide any information required by the Spanish Treasury concerning the public debt market and the primary dealer’s trading activity in the market. Market makers are requested to send a monthly report about their activity in the primary and secondary markets.
PrivilegesAdvantage of an extra half hour for the submission of bids at bond auctions; exclusive access to the second round in auctions; exclusive access to stripping and reconstitution of bonds; privileged counterparties of the issuer in its overall debt management activity (swaps, foreign currency issues, and the like); access to regular meetings with the Treasury as well as input to determine debt issuance target goals at each auction.
Supervision and enforcementMinistry of Finance.
Formal agreementYes. Once an institution has been granted the status of “Public Debt Dealer” and has developed one month of trading activity (during which it must have behaved almost as a PD), an application form must be sent to the General Director of the Treasury with a memorandum attached, revealing the technical and human resources to develop market-making activity in the Public Debt market of the Kingdom of Spain and accepting all commitments set forth in the “Order of the Ministry of Economy of 02/10/99” (developed by Resolution of the Spanish Treasury, 20/02/02). Once those requirements are fulfilled, the General Directorate of the Treasury and Financial Policy, after receiving a positive report from the Bank of Spain, will grant that institution the status of PD by publishing it in the official bulletin.
Revision of statusMonthly oversight with an intended annual revision horizon.
System evolution over timeFirst, the status of PD was granted only to institutions resident in Spain. In March 1999, it was extended to nonresident institutions. Commitments and advantages have also increased.
Relation between the size of public debt and the desirability of PDThe larger the size of debt, the greater the need for PDs.
Recommendation of PD systemStrongly recommended at the early and middle development stage. Also recommended at the advanced development stage. We think that PDs are always good for debt markets. However, in very mature and large debt markets they may not be as necessary.
AdvantagesThey allow for a broad and efficient secondary market for government securities. With respect to the primary market, they ease the allocation of new issues.
DisadvantagesWe cannot see any disadvantages to having PDs.
Sweden1
Dealers in government securities7.
System established1989.
PD institutions7 PDs composed of commercial banks and brokers.
Selection criteriaMinimum capital and involvement in government securities market.
PD obligationsObligation to bid in the auctions, to report to the central bank, and to contribute with good liquidity in the market.
PrivilegesExclusive access to primary auctions and counterparty for central bank’s open market operations.
Supervision and enforcementCentral bank and Finance Supervisory Institution.
Formal agreementYes.
Revision of statusAnnually.
System evolution over timeOwing to a declining borrowing requirement over the last few years, the number of PDs has decreased from 15 to 7 during the last four years.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemStrongly recommended at the early development stage. When a country is in a buildup phase regarding development of its financial markets, a PD system gives some insurance and stability to the market’s functionality.
AdvantagesIn order to have some guarantee of providing good liquidity, PDs are the best alternative. For the moment, the Swedish National Debt Office (SNDO) is not paying any fees or provisions in the nominal bond market. Some countries have systems that include fees to the PD.
DisadvantagesNA.

Changes in the authorized dealer system (the name “primary dealer” is now used for the central bank’s dealers) have taken place since the survey was made, and were communicated to the authors. The major changes include (1) the SNDO and the central bank appoint their own dealers, i.e., SNDO’s authorized dealers are not automatically counterparties in the central bank’s open market operations; (2) authorized dealers shall quote binding two-way prices with maximum bid-offer spreads in nominal government bonds in the electronic trading system; and (3) the Debt Office pays fixed and performance-related (based on market share in the primary and the electronic interbank dealer market) commissions to authorized dealers in nominal and inflation-indexed-linked bonds.

Changes in the authorized dealer system (the name “primary dealer” is now used for the central bank’s dealers) have taken place since the survey was made, and were communicated to the authors. The major changes include (1) the SNDO and the central bank appoint their own dealers, i.e., SNDO’s authorized dealers are not automatically counterparties in the central bank’s open market operations; (2) authorized dealers shall quote binding two-way prices with maximum bid-offer spreads in nominal government bonds in the electronic trading system; and (3) the Debt Office pays fixed and performance-related (based on market share in the primary and the electronic interbank dealer market) commissions to authorized dealers in nominal and inflation-indexed-linked bonds.

Thailand
Dealers in government securities50.
System establishedJune 5, 2000 (first established as central bank counterparties in August 1999).
PD institutions9 commercial banks.
Selection criteriaMinimum capital, involvement in government securities market, risk management system, and coordination with authorities in developing the market.
PD obligationsObligations to quote two ways.
PrivilegesExclusive counterparty for central bank’s open market operations.
Supervision and enforcementCentral bank.
Formal agreementMemorandum of understanding.
Revision of statusAnnually.
System evolution over timeAfter conducting transactions with primary dealers, the turnover in the secondary market has increased dramatically.
Relation between the size of public debt and the desirability of PDNo, the number of primary dealers is based on the proportion of them in the secondary market.
Recommendation of PD systemStrongly recommended at the early development stage. PDs provide information about the desired direction of market development and cooperate with central bank and Debt Management Office in the development process, enhance the liquidity in the secondary market, and have a commitment to participate in the auction.
AdvantagesThe system provides an effective channel for conducting open market operations and for active market makers who will enhance the liquidity in the secondary market and ensure successful outcomes in the primary market auction.
DisadvantagesIf the primary dealers are not efficient, the liquidity injection and absorption of the central bank will not be successful.
United Kingdom
Dealers in government securitiesNA.
System established1986.
PD institutions17 primary dealers composed of commercial and investment banks, and security houses.
Selection criteriaInvolvement in government securities market; membership in a Recognised Investment Exchange; produce viable business plan to be approved by the Debt Management Office (DMO); Financial Services Authority (FSA) to confirm that they are satisfied with the business plan.
PD obligationsTo quote firm and two ways; to report to the DMO; no obligation to quote to other PDs; obligation to report trades to London Stock Exchange.
PrivilegesExclusive access to primary auctions and participation in consultation meetings, secondary market dealing with DMO, access to inter-dealer broker screens (for dealing with closed user group of PDs).
Supervision and enforcementMinistry of Finance/DMO and FSA.
Formal agreementYes, it is a “contractual letter.”
Revision of statusSemiannually.
System evolution over timeThere are now fewer PDs, mostly due to bank mergers. The deal size has increased. Additional moves have been made toward e-trading. There is a closer relationship between the PD and the authorities.
Relation between the size of public debt and the desirability of PDNo.
Recommendation of PD systemRecommended at the early development stage. During early stages of economic development, most government borrowing will be from foreign institutions with only a small presence in one developing country. As more borrowing is carried out from domestic intermediaries, this will be more conducive to a PD system.
AdvantagesMore liquid market; easier to be transparent; easier auctions and settlement; reduced credit risk monitoring; distribution of securities.
DisadvantagesAdministrative burden; acquisitions of cartels; requires supervision.
United States
System established1960.
PD institutions25 primary dealers composed of commercial and investment banks, and foreign institutions.
Selection criteriaMinimum capital, involvement in government securities market, the institution cannot have been convicted of a felony crime. There is no specific requirement as far as the extent of involvement in the government securities market.
PD obligationsTo bid in the auctions, to report to the central bank. The obligation to bid in the auctions is not contractual, and the PDs are not necessarily expected to participate in every auction. PDs are also expected to participate in the Federal Reserve’s open market operations and other business activities. PDs are also expected to provide the Federal Reserve with market information and analysis.
PrivilegesWhile an exclusive counterparty for the central bank’s open market operations, customers of dealers can participate through a primary dealer. Also, while dealers do not have borrowing privileges (for funds) with the central bank, they do have the ability to borrow securities from the central bank’s portfolio during its daily securities lending operation.
Supervision and enforcementCentral bank, Ministry of Finance, and the Federal Reserve are primary in evaluating the performance of the PDs vis-à-vis their activities and obligations with the central bank, but they do not regulate or supervise the PD as a “regulator.”
Formal agreementThere is no formal agreement between the Federal Reserve and the PD regarding its status as a primary dealer. There are some transaction-specific legal agreements.
Revision of statusPerformance evaluations are held with the PD semiannually, or more frequently if necessary.
System evolution over timeThe number of PDs peaked in 1988 at 46. The number has since declined to 25, largely due to consolidation in the financial services industry. In 1992, the Federal Reserve made changes to its relationships with PDs, primarily due to the misconception that the Federal Reserve regulated the PDs and that the PDs’ designation gave them a special status. Specific actions taken were to eliminate the 1 percent market share requirement and to discontinue dealer surveillance activities.
Relation between the size of public debt and the desirability of PDNo, the two are not necessarily related.
Recommendation of PD systemRecommended. This depends on a great number of factors.
AdvantagesHaving a PD system facilitates the implementation of monetary policy by having a stable set of counterparties that are obliged to participate in open market operations and other central bank business.
DisadvantagesThe designation of “primary dealer” is often viewed as giving the institutions a special status or guaranteeing their creditworthiness.

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