Primary Dealers in Government Securities
Policy Issues and Selected Countries Experience

Contributor Notes

Authors’ E-Mail Addresses: marnone@imf.org; giden@imf.org

In many countries, authorities have designated a group of financial firms as the principal intermediaries in the government securities market-referred to as "primary dealers" or a "primary dealer system." This paper discusses policy issues related to the establishment of a primary dealer system for countries that may be considering taking this step. In this regard, a key issue is whether a primary dealer system fits into the overall strategy for financial market development in the country. Under a primary dealer system, the debt manager and the group of primary dealers pursue a common strategy in support of the effective functioning and development of primary and secondary markets for government securities. This paper presents results of a survey of country practices conducted in early 2001. Among the countries surveyed, there was broad agreement among authorities that a primary dealer system is to be highly recommended.

Abstract

In many countries, authorities have designated a group of financial firms as the principal intermediaries in the government securities market-referred to as "primary dealers" or a "primary dealer system." This paper discusses policy issues related to the establishment of a primary dealer system for countries that may be considering taking this step. In this regard, a key issue is whether a primary dealer system fits into the overall strategy for financial market development in the country. Under a primary dealer system, the debt manager and the group of primary dealers pursue a common strategy in support of the effective functioning and development of primary and secondary markets for government securities. This paper presents results of a survey of country practices conducted in early 2001. Among the countries surveyed, there was broad agreement among authorities that a primary dealer system is to be highly recommended.

I. Introduction and Summary

This paper discusses the role of primary dealers in the management of public debt for countries that may be considering establishing such a system. One of the goals of the paper is to provide guidance on how to design a primary dealer system in an appropriate way to meet market development needs.2 In addition, it tries to answer the question of under what conditions would a primary dealer system make a positive contribution to the functioning and development of the government securities market. However, it is difficult to give a precise analytical answer to this question for all countries, and thus the paper will draw on practical experiences for individual countries. To provide empirical support and detailed information for the project, a survey on primary dealers practices and views was sent to 47 countries, varying widely in terms of size and stage of economic development, and responses were received from 39 of these.

Many, but by no means all, industrial countries already have primary dealer systems, although many that do have established them only in the last few years. In addition, a number of emerging market and developing countries have either adopted, or are in the process of adopting, primary dealer systems, but many others have not done so.

Essentially, a primary dealer system is an agreement between two major stakeholders in the domestic government debt market—the debt manager and a group of dealers—to pursue a common strategy in support of the functioning and development of primary and secondary markets for government securities. Primary dealers (PD) are financial intermediaries that, generally in exchange for specific privileges, agree to perform specific obligations or functions in the operation of markets for government securities. Following from this definition, the roles include

  1. acting as a channel between debt manager and investor in the primary market (for example, by participating in auctions);

  2. performing as bookmakers and distributors by having dealers that canvass investors’ interest and distribute securities ahead of auctions through when-issued markets.

  3. acting as providers of immediacy of liquidity to primary and secondary markets;

  4. acting as providers of asset transformation and market-making services by being willing to hold inventories of government securities and allowing investors to swap between various outstanding issues of government securities on a continuous basis helps bring liquidity to the market;

  5. promoting continuous markets and efficient price discovery by organizing dealers within an appropriate market structure that can encourage efficient price discovery;

  6. acting as agents and relationship managers educating investors about the attractiveness of government securities as an investment; and

  7. being advisors to the government by formulating and adopting appropriate strategies for the development of products and markets.

Selection criteria for primary dealers typically include financial strength as indicated by adequate capitalization; an active role in government securities markets and financial expertise, such as skilled management and staff, together with access to appropriate technology. Obligations generally include one or more of the following: (i) participating in the primary market in a substantial and consistent manner; (ii) serving as a market maker in the secondary market by providing two-way quotes, either indicative or firm, for specified groups of securities; and (iii) providing market-related information to the public debt manager, whose main objective is to ensure that the government’s financing needs and its obligations are met at the lowest possible cost, consistent with a prudent degree of risk.3 Privileges, or supporting arrangements, which vary widely among countries, generally involve the granting of some aspect of exclusivity—for example, the exclusive right to participate in the auction for treasury bills, and/or the right to serve as a counterparty to the central bank when it conducts open market operations, and/or access to a line of credit or permission to borrow particular issues from the central bank.

Among the respondent countries in the survey, there was broad agreement that primary dealers are recommendable—that is, they make a positive contribution to the development and liquidity of government securities markets of countries that did not have primary dealer systems (10 countries). Several respondents indicated that their markets were not large enough to support a sufficient number of primary dealers to ensure competitive behavior, while some of the more advanced countries indicated that their markets were functioning well without primary dealer systems (for example, Germany and New Zealand). Regarding the issue of at which stage of development one should introduce a primary dealer system, more than half indicated that it was either always desirable or desirable to do so in the early stages of development. With respect to later introduction, however, some of the detailed comments pointed toward conditions that should be present before development of a primary dealer system, such as the existence of a legal and supervisory system, and an adequate payment system.

The remainder of the paper is organized as follows. Section II discusses the objectives and rationale for a primary dealer system. Section III describes the benefits and costs of a primary dealer system, and Section IV the necessary conditions for a primary dealer system. Section V summarizes the results of the survey questionnaire on primary dealers that was sent to 47 countries. More details on the countries’ responses are provided in the two appendices.

II. Objectives and Rationale for a Primary Dealer System

The main purposes of a primary dealer system include strengthening the primary market by helping to build a stable, dependable source of demand for securities, by providing liquidity in the secondary market, devoting capital resources to underwriting (as a proprietary buyer) to absorb an occasional shortfall of liquidity, building distribution channels (to act as intermediaries) and providing market information, including prices, volumes, and spreads between bids and offers. These objectives in turn, serve the overall goals of: (i) lowering the cost and associated risk of servicing the public debt, (ii) developing financial markets, (iii) enabling the central bank to use indirect instruments of monetary policy, and (iv) encouraging saving by providing a relatively risk-free investment with attractive returns.

Development of financial markets involves a broader set of policies than just establishing a primary dealer system. In particular, some countries may have set up primary dealer systems without necessary supporting policies, including a commitment to a market-clearing outcome. Based on empirical observation, establishment of a primary dealer system can be an efficient way to develop and execute a coordinated approach to market development and thereby accelerate the development of market structure. Practical experience shows that primary dealer systems are in many cases a very helpful and efficient way to build up a market as well as maintain the functioning of the market in later stages. Other ways to set up markets, however, do exist,4 and in the choice of different setups country specificity and historical (path-dependence), considerations might well play a role, in addition to theoretical considerations.

In addition, setting up a system of primary dealers can be interpreted as a response to a market failure, if the government perceives that the existing market structure is not performing efficiently or if the market does not yet exist or is very thin. This happens typically in many developing countries, where the rationale for primary dealers may rest not only on efficiency arguments but also on developmental reasons, as argued below. Additionally, the creation of a primary dealer system can be seen as a commitment to sound debt management practices. By selecting a specialized set of institutions, the authorities might be signaling to the financial community and the public at large their commitment to a liberalized market and a sustainable public debt strategy. Therefore, defining such a group of qualified dealers might increase investors’ confidence in government securities as an investment.

In analyzing the issue of primary dealers, it is important to include considerations of securities market structure and development, and coordination of the various players involved. A decision whether to set up a primary dealer system, and the associated design, can be considered not only from a developmental point of view but also, in more advanced economies, from a market structure point of view. In this context, design of the mix of obligations and privileges must be an integral part of the strategy for developing and improving a government securities market, and the design itself can target market development (create a market, accommodate public sector borrowing requirements) and/or market structure (competition, efficiency, financial instruments).

From a developmental point of view, in the early stages of development the authorities might view the existence of a group of specialized institutions as instrumental in supporting their efforts to develop a market for government securities. These institutions would concentrate limited expertise and scarce resources in a limited number of players, thereby facilitating coordination among players and supporting a smooth market process. For instance, in the absence of liquid funding markets, a broad and well-informed investor base, available and well-developed trading platforms, and a supporting infrastructure, a primary dealer system can be a very useful platform upon which to develop the government securities market. In this context, it is clear the developmental role that a coordinated set of players can have in supporting government-borrowing strategy, while at the same time creating some of the conditions for the use of indirect instruments of monetary policy.

The design of the primary dealer system as a developmental objective should aim at a mix of obligations, privileges, and supporting arrangements that help the authorities to achieve their objectives. Equally important, other supporting markets or infrastructures are likely to be missing in this context, so there must be a commitment from the authorities to implement policies to put in place necessary infrastructure (e.g., book-entry system, DVP, and bidding technology) and to develop other markets (interbank market and local capital market, for instance). Given this background, the performance of primary dealers can be expected to be less than optimal, but mechanisms should be put in place to limit possible non-competitive behavior and moral hazard.

In more advanced economies, where developmental issues become less pressing, a market structure approach is also useful. When a country has already developed market intermediaries and infrastructures, the reasons for having a primary dealer system are different from the ones highlighted above. Arguments for specialization and economies of scale tend to prevail, and country experience in advanced economies (France, Italy) indicates that a primary dealer system accomplishes several objectives: (i) decreases market and refinancing risk, (ii) improves knowledge of the market, (iii) strengthens product and process innovations, (iv) provides better access to end investors, (v) improves promotion of debt, and (vi) provides skillful advisory support in building and following the debt management policy. One could also argue that some potential threats to an efficient market functioning must be taken into account—for instance, by selecting a preferential group of intermediaries, the authorities might reduce competitive neutrality and limit contestability. In addition, when the authorities have introduced on-line trading systems and financial markets and intermediaries are extremely sophisticated, as in the United States, which has had a system of primary dealers for a long time, the case for a primary dealer system becomes less clear. When there are substantial fiscal deficits and financing needs, however, primary dealers may continue to play a positive role in the primary market even in developed markets.

The practice of selecting a specialized group of intermediaries for government securities can be seen as similar to the practice of private commercial borrowers that implement their financing strategy via placements through a specific group of investment banks for the same reasons highlighted above (advisory, access investors, lower market and financing risk and so forth). However, there are additional risks in taking this approach by a government with a specific group of primary dealers. One risk is increased moral hazard, or the possibility that designated primary dealers will engage in more risky behavior because they have been selected by the authorities. Also, customers may assume in error that primary dealers are guaranteed by the government or central bank. In addition, compared with the private market solution, selection by the authorities may risk reduced contestability and possible anti-competitive behavior.

Therefore, it is essential that in deciding for the adoption of a primary dealer system, the authorities design mechanisms to reduce these risks, while preserving as much of the benefits as possible. Contestability can be supported by rotating primary dealers based on performance (Mexico), while the risk of anti-competitive behavior must be addressed by strengthening supervision. The argument for moral hazard/implicit guarantees must also be addressed in the context of liquidity/crisis management policies by designing an appropriate structure of incentives and controls.

In deciding for the adoption of a primary dealer system, the authorities should simultaneously address these issues to achieve their debt management objectives while maximizing market efficiency. Countries that have fairly advanced markets and intermediaries, but that for some reason would not be able to address the negative effects induced by the introduction of a primary dealer system, should strengthen their capacity of intervention in these areas before putting the system in place, or phase in supervisory and regulatory reforms at the same time. While in developing economies the developmental aspects can outweigh downsides related to market structure, in more advanced economies the authorities should clearly evaluate whether the market would not be able to perform the same functions without introducing a selected subgroup of specialized intermediaries.

Another aspect of a primary dealers activity in the secondary market is to serve as an intermediary between the debt manager, often the central bank, and retail investors. In this regard, primary dealers are often expected to serve as partners with the debt manager and central bank in developing the institutional and retail markets. This function may include educating the public about investing in government securities.

In recent years, a number of debt managers in developed economies have been moving into direct retail sales of securities over the internet. More generally, modernization of markets and automation are making some of the functions traditionally performed by primary dealers less important or redundant. For example, automation gives a means to handle large numbers of participants in auctions that was not previously possible. Electronic markets offer information on market conditions and prices that might formerly have been possible to have only directly from dealers. Whether this recent trend in developed economies also applies for the needs of developing countries depends on country-specific situations, given the technological possibilities and constraints that different countries face.

III. Benefits and Costs of Primary Dealer System

By selecting certain firms as primary dealers and not others, authorities concentrate market activity in a smaller number of firms, which has both positive and negative implications. On the positive side, especially in the early phases of market development, there can be important efficiencies associated with larger volumes of financial transactions, including automation and more advanced technology, and the use of specialized, highly skilled personnel. Acquiring these resources has substantial fixed costs, and spreading these costs over a larger volume makes them more economical. Competition and efficiency can also increase if foreign firms are allowed to become primary dealers, if as seems likely those firms are advanced and have an international clientele. In addition, there are advantages to the debt manager in limiting the number of institutions with which it has to deal in conducting auctions of government securities and (if it is the central bank) in its open market operations. A general benefit of a primary dealer system is that it reduces both risks and the risk management burden. The quality criteria reduce credit, execution, settlement and operational risks; and the limited number of dealers makes the administrative and credit monitoring burden more manageable.

The most significant possible problem of setting up a primary dealer system is the risk of promoting a less than efficient market structure. A primary dealer system is a dealer market structure; developing one involves choosing (by the issuer) this particular market structure for the trading and issuance of debt. If alternative market structures are more efficient or appropriate, then a primary dealer system is best avoided and a different and more appropriate country-specific strategy developed.5

A second drawback of a primary dealer system is that it can potentially limit competition and contribute to oligopolistic behavior. Since selection is fundamental to a primary dealer system, it can in some respects run counter to the principle of establishing a level playing field. To a considerable extent, however, these potential “negatives” can be avoided by careful design of the system, for example, by not unduly limiting the number of market participants.

In addition, by selecting a group of financial firms to serve as primary dealers, there is a risk that the public may view them as possessing an implicit guarantee by the government. There may also be moral hazard in that guarantee, in that once selected as a primary dealer, the primary dealer may engage in more risky behavior, believing that the government would not stand by and let it fail. In this regard, the primary dealer might be induced to take on more risks than it otherwise would. Authorities should try to reduce this moral hazard by supervision and by allowing contestability. For example, periodically, authorities may reassess and reselect the group of primary dealers.

Since establishing a system of primary dealers has its pros and cons, an important question concerns whether, or under what conditions it is helpful to have such a system. In general, the answer depends on the authorities’ overall strategy for developing the government securities market and the appropriate microstructure for the market. In particular, if authorities envision a secondary market structure in which there are competing dealers and market makers, then a primary dealer system may be an appropriate choice. However, authorities may opt for an auction system with direct buy and sell orders to a single location or electronic matching system, in which case a primary dealer system might not be appropriate. Or, alternatively, the secondary market may be too small to support an effective number of primary dealers, in which case the authorities may decide as a transitional measure to open a secondary window at the central bank.

The justification for establishing a system of primary dealers is that the system satisfies public goals that might otherwise not be met. One of the main goals in this regard is to maintain or enhance the liquidity of secondary markets. A liquid market may involve external benefits that accrue to other parties that are not directly involved in the government securities market.

It may be useful to consider whether the tradeoff between the advantages and the disadvantages of a primary dealer system changes during the course of economic development. In the early stages, for instance, not all of the key conditions may be present for an effective primary dealer system. In particular, there may not be enough dealers who are active in the government securities market. Moreover, in those early stages, the commercial banks, which are some of the most likely candidates for primary dealership, may have a vested interest in not developing the government securities market, since they have competing products and may profit from the scarce opportunities of their depositors. In addition, the size of the financial system, and of the government securities market in particular, may play an important role, with smaller countries finding it more difficult to justify a primary dealer system. In this context, the potential for specialization on the part of dealers in government securities is limited by the small size of the financial market. At the same time, the potential contributions of a primary dealer system—developing the primary and secondary markets and developing the retail base for government securities—are most relevant for developing and emerging-market countries.

In the latter stages of financial development, especially in large diversified financial systems (Germany or Switzerland), the need for, or potential contributions from a primary dealer system may be less important. In many developed countries, there may be a relatively large number of active participants in the primary market; and there may be an active and highly competitive secondary market, while retail investors have a number of attractive alternatives. Thus, some industrial countries, such as Australia, Germany, Japan, New Zealand, and Switzerland, do not have primary dealer systems, while the United States with the largest and most diversified financial system in the world does have such a system. The United States, however, has reduced the privileges of primary dealers over time, and opened the system to more competition. Now, aside from being recognized as a primary dealer, the main privilege is to be one of the counterparties to the Federal Reserve when it conducts its open market operations. More generally, the role and specific features of a primary dealer system may change during the course of economic development.

IV. Necessary Conditions for a Primary Dealer System

Important prerequisites for establishing a primary dealer system include at least eight listed below:

A government must have a strategy for issuing government securities: a government must accurately plan its debt issuance strategy so as to provide a medium-term horizon for the investment strategy of primary and secondary market agents.

Interest rates should be liberalized: it is essential, that interest rates on government securities reflect actual demand and supply, in both the primary and secondary markets, to guarantee efficient price discovery.

An adequate number of end investors is necessary: this means that the government should try to estimate potential demand among individuals and the financial sector and be able to fine-tune its own supply, arising from its financing needs, to be able to meet potential demand. Preliminary discussions with banks will help the government gauge this potential absorption capacity.

A minimum set of attractively designed securities should be available: In deciding its debt strategy, the government should plan for a certain number of different types of securities, taking into account different maturities and trying to establish benchmarks. In addition, other instruments could include index-linked securities, inflation-linked securities, to mention just some simple examples that can help investors diversify their portfolios of instruments and provide instruments for risk management.

The government must be committed to secondary market development: this condition is important because it guarantees the primary dealers and other market participants that they will not compete directly with the government in the placement of securities in the retail market. The authorities should refrain from intervening directly in the market, for instance, limiting or avoiding, direct sale of securities.

The government must also be committed to market-determined outcomes: the authorities should make efforts to stimulate a setup of the primary and secondary market to allow competitive forces to play a dominant role. In this context, primary dealers should not be seen as a captive group that can be burdened with government securities, but rather as the initiators of a market or a group providing additional liquidity and transparency to the market for the purpose of better price discovery and resource allocation.

Arrangements between primary dealers and the debt managers in support of the auction system should be carefully arrived at: this is an important prerequisite, since the auction is the central mechanism for securities allocation in the primary market. The auction design must allow an efficient price discovery. Problems in auction design are bound to have a strong negative effect on subsequent segments of the market, since inefficient price discovery or inefficient allocation will impact the secondary market both at wholesale and retail level.

Sufficient debt and a potential volume of secondary market trade should be available to support a profitable group of competing dealers without subsidies for the operations: with respect to the size of the market, it is important to have an adequate number of active participants in the market, and enough volume in government securities issued to justify a primary dealer system. In addition to authorities’ commitment to market-determined prices and attainment of a minimum size of the market for government securities, there are other highly desirable conditions for establishing a primary dealer system, including a legal framework for government securities, a regulatory/supervisory system for government securities dealers, and an adequate payment and settlement system. However, the primary dealers can be used as a platform and an integral part of the building of such systems. In many developing and emerging market countries for instance, primary dealers have been used as custody agents as part of the book entry system. They have been given accounts with central banks to clear and settle on a Delivery Versus Payment (DVP) basis. In addition, in some countries, the setting up of primary dealers has been the cornerstone of developing efficient primary markets.

In the early stages of development and for many small developing countries, there may not be enough participants in the government securities auctions to reduce the number further by establishing a primary dealer system. Having an adequate number of participants in the auction may be a particular problem if the authorities are trying to limit participants to commercial banks for clearing and settlement purposes. If the main objective is to be as inclusive as possible for bidding at the auctions, then limiting the numbers further in order to start a primary dealer system may be inappropriate.

Thus, one of the respondents to the questionnaire from countries without primary dealer systems said the reason the country had not set up a primary dealer system was the small size of the market (Latvia), and another (Chile) that there were too few participants for establishing a primary dealer system.

What is the minimum number of primary dealers to ensure an acceptable degree of competition? While there are no absolutes on this issue, five to seven seemed to be among the minimum numbers of primary dealers cited by respondents in the MAE survey (e.g., Mexico, Norway, Armenia, Morocco, and Sweden), although Iceland, which recently established a primary dealer system, has only five primary dealers. Chile, in particular, indicated that four to seven primary dealers were not enough—a key reason why Chile did not adopt a primary dealer system.

Based on the survey, the typical number of primary dealers for a country with a successful primary dealer system seemed to be approximately 15, and 20 to 26 primary dealers was toward the high end of the range.6 Several respondents indicated that the number of primary dealers had been increased as the volume of dealing had grown over time (e.g., Brazil and India), while several others indicated that the number had fallen as the volume of securities issued had declined (e.g., Canada and Sweden). There were also other reasons for a trend toward declining numbers of primary dealers, including in particular, consolidation of the financial services industry. In the case of the United States, the number of primary dealers peaked in 1988 at 46, and has since declined to 25, owing largely to consolidation within the industry.

V. Survey Results

In April 2001, a survey questionnaire on primary dealers was sent to 47 countries. Of the 39 respondents, yielding a turnout rate of about 83 percent, 20 are advanced economies, 13 are emerging markets, and six are developing countries.

Among the respondents, 29 have primary dealers and 10 do not. Fourteen introduced primary dealers after 1995 (Figure 1), indicating a relatively recent trend in establishing primary dealers, but also indicating a relative degree of satisfaction with primary dealerships. Among the countries included in the survey that have not established a primary dealer system, three are advanced economies (Australia, Germany, and New Zealand), four are emerging markets (Chile, Indonesia, Latvia, Poland), and three are developing countries (Kenya, Mauritius, and Saudi Arabia).7

Figure 1.
Figure 1.

Year of Establishment of a Primary Dealer

Citation: IMF Working Papers 2003, 045; 10.5089/9781451846492.001.A001

Countries with a system of primary dealership have a wide range of Public Debt/GDP ratios, but a certain concentration of countries can be noted around a 35 to 50 percent ratio. Figure 2 relates the presence of PD with the size of debt relative to GDP in the initial year of primary dealership.

Figure 2.
Figure 2.

Debt-to-GDP Ratio as of the Introduction of Primary Dealer (PD) System, or as of 1999 for Countries without Primary Dealer Systems

Citation: IMF Working Papers 2003, 045; 10.5089/9781451846492.001.A001

Fourteen (or 36 percent) of the respondents perceive a link between the size of public debt and the desirability of having a primary dealer system. Specifically, among advanced economies nine of the respondents think that there is a relationship between the size of public debt and the desirability of primary dealers, namely Belgium, Canada, Finland, Greece, Italy, Norway, Singapore, and Spain, with Australia agreeing only for small market size. Two share this view among emerging markets (India and Poland) and three among developing economies (Kenya, Mauritius, and Saudi Arabia).

In reporting the most important advantages mentioned in the survey responses, we can distinguish between the primary and secondary market. In the primary market, several countries (Armenia, Australia, Canada, Ghana, India, Italy, Kenya, Spain, and Thailand) mentioned that a primary dealer system improves the coverage/underwriting of the auction and some pointed out the support that the debt manager can gather with professional market information and market-tailored securities (Hungary, Italy, Morocco, Netherlands, and Poland). In regard to the secondary market, most countries mentioned improved market liquidity; and Canada, Iceland, India, Ireland, Korea, Norway, Singapore, and Thailand mentioned the creation of market making activities. At a more general level an important contribution is the development and well functioning of the secondary market that primary dealers can help ensure, a point made by Australia, Canada, Chile, Hungary, Indonesia, Mauritius, Saudi Arabia, Singapore, and Spain.

With respect to monetary operations, the United States, Brazil, India, Thailand, Kenya mentioned that the presence of a stable set of counterparties of the central bank facilitates the implementation of monetary policy (for those countries where primary dealers in government securities coincide with central bank counterparties for monetary operations).

Table 1.

Survey of Advantages of a Primary Dealer System

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Source: Survey of national authorities.

The strongest disadvantage that most countries noticed of having a primary dealer system is the potential distortion of competition and the creation of uneven playing fields, giving an unfair advantage to some market participants (lack of competitive neutrality, constrained contestability and likelihood of conservatism). Canada therefore stressed the need for regular monitoring and Saudi Arabia for regulatory guidelines, while Mexico underlines the importance of a careful balance between obligations and privileges. Brazil mentions potential informational asymmetries, while Italy noticed the risk for the debt manager to be influenced by views that tend to represent the interest of the primary dealers. If competitive behavior is not assured, then Indonesia points out that price formation might not lead to a competitive market price. The USA noted that the official designation of “primary dealers” could be (erroneously) viewed as granting a special status or guaranteeing creditworthiness.

On the other side, France, Iceland, Kazakhstan, Korea, Netherlands, and Spain, indicate no disadvantages with a primary dealer system.

Table 2.

Survey of Disadvantages of a Primary Dealer System

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Source: Survey of national authorities.

There is broad agreement among the respondents (87 percent overall approval) that primary dealers are recommendable, with 55 percent “strongly recommending” their presence and 32 percent just “recommending” their presence in the market for government securities (see Figure 3). Five percent “weakly recommend” the adoption of primary dealerships and 5 percent of the respondents think it is “not recommendable” to have primary dealers. The remaining 3 percent are uncertain.

Figure 3.
Figure 3.

Recommendation of Primary Dealer System

Citation: IMF Working Papers 2003, 045; 10.5089/9781451846492.001.A001

Source: Survey of national authorities.

Among advanced economies, 16 out of 19 “recommend” or “strongly recommend” the adoption of a primary dealer system, while the remaining 3 are “uncertain” or give no answer (Australia and New Zealand) or give a negative answer (Germany). Among the latter group, the view was expressed that at advanced stages of development primary dealers are not necessary, or are possibly harmful. Among emerging market economies, 11 countries out of 13 “recommend” or “strongly recommend” primary dealers, while Chile does not answer and Latvia thinks primary dealers are not recommendable. Among developing economies, all six countries “recommend” or “strongly recommend” the adoption of a primary dealer system.

In terms of supervision and enforcement of obligations, more that 15 countries reported the ministry of finance as main supervisor, and a few less mentioned the central bank, with several countries indicating shared responsibilities also with other agencies. Among advanced economies, nine review the primary dealer status on a 12-month basis, while Singapore, the United Kingdom, and the United States hold reviews every six months. Finland reviews the primary dealer status only when necessary; the remaining advanced economies have review periods longer than 12 months. Among emerging market countries, Argentina, India, Kazakhstan, Korea, and Thailand review primary dealer status every year, all the others have shorter review lags. A review period of six to 12 months can be considered standard practice among surveyed countries.

On the issue of primary dealership across stages of development, there seems to be a degree of consensus related to the presence of primary dealers in various phases of a country’s economic development: 38 percent of the answers indicated that it is recommendable to have primary dealers already in the early stage of economic development, and 15 percent indicated that it is always wise to have primary dealers (see Figure 4).

Figure 4.
Figure 4.

Phases of Economic Development and the Establishment of Primary Dealership

Citation: IMF Working Papers 2003, 045; 10.5089/9781451846492.001.A001

Source: Survey of national authorities.

APPENDIX I

I. Summary of Primary Dealer System Characteristics

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APPENDIX II

II. Complete Survey Results by Country

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1

The authors would like to thank Peter Dattels, Jennifer Elliott, Mats Filipsson, Robert Price, Christine Sampic, Andrea Schaechter, Mark Stone, V. Sundararajan, Mark Swinburne, Piero Ugolini, and Mark Zelmer for their helpful comments, and Sandra Marcelino for her excellent research assistance. We would also like to express our gratitude to the national authorities that participated in our survey.

2

The operational and technical issues related to the establishment of a primary dealer system are developed in Arnone and Iden (2002).

4

See International Monetary Fund and World Bank, 2001b, Developing Government Bond Markets—A Handbook (Washington), Chapters 5 and 7.

5

For a more detailed discussion of the choice of market structure and the role of primary dealers, see Peter Dattels, 1997, “Microstructure of Government Securities Markets,” in Coordinating Public Debt and Monetary Management, edited by V. Sundararajan and others (Washington: International Monetary Fund), pp. 209–82.

6

Among the countries with primary dealer systems, the average number of primary dealers was 14.5, and the median number was 13. Countries in the lowest quartile (in terms of number of primary dealers) had 8 primary dealers. Austria, the Czech Republic, Ghana, and Korea had the largest number of primary dealers—each with 26, and the United States was next with 25.

7

Informal primary dealerships might have been in place for some countries before formalizing the arrangement. Years of establishment of a primary dealer system, indicated in Figure 1 as reported in the survey of national authorities, might therefore differ depending on whether a formal, as opposed to factual, interpretation is adopted, and country-specific factors.