WASHINGTON -- A prestigious committee of bond market participants has concluded that recent changes in the Treasury securities market could cause additional companies to drop their primary-dealer businesses.
The panel said a continued exodus of primary Treasury dealers, many of them commercial banks or their affiliates, could leave a small group "more homogeneous than the Federal Reserve might otherwise choose."
With the primary-dealer system changing rapidly as financial markets become more competitive, "it would seem preferable to change the system formally" before too many dealers take themselves out voluntarily.
The blue-ribbon committee on emerging issues in the Treasury market was formed by the Public Securities Association in the wake of disclosures of improper dealing by Salomon Brothers, which prompted unprecedented government investigations of the Treasury market.
Stephen Thieke, a former senior official of the Federal Reserve Bank of New York, was chairman of the Public Securities Association committee.
Its study pointed out that all of the special privileges that accompanied the status are in the process of being removed as a result of market changes. Among them are recent changes in auction procedures, wider access to market information, and broader access by traders to interdealer brokers' screens.
Any redical changes that the government may want to introduce to the Treasury market should be delayed until after the auction process is automated, the committee said. Automation would greatly facilitate the introduction of changes to the primary-dealer system.
Preservation of the current system, in which 39 primary dealers work directly with the government to issue its debt, has improved U.S. firms' international competitiveness and served as a lever to provide access to foreign markets, the Public Securities Association study said.
"In the absence of a primary-dealer designation, this tool would no longer be available in international trade negotiations," the panel warned.
Rising Credit Exposure
The committee also stated that the Treasury Department, "Should carefully assess the additional credit exposure it has assumed with the recent cahnges in the bidding rules that expand direct access to auctions without requiring deposits and that permit any broker-dealer to bid on behalf of customers.
Treasury could limit its credit exposure by becoming a participant in the Government Securities Clearing Corp., the panel suggested.
"If the existing system were eliminated, the result could by somewhat lower market liquidity, higher risks of auction failures, and, possibly, marginally more costly open market operations.
"Regardless of whether an explicit decision is made to change the system, it should by recognized that the longstanding system has recently been changing in a number of important ways," the report went on.
"In light of these changes, a number of primary dealers may assess their respomsibilities to the Treasury and the Federal Reserve and decide that the designation is no longer in their interest."
The committee said policy makers must decide if the goals of assuring liquidity and orderly distribution of debt - the benefits of the current system - outweight the desire to open up the market and limit the government's involvement.