Primary Dealers Hope '92 Won't Bring Painful Rules

NEW YORK - Primary dealers of U.S. government securities, ending a tumultuous but profitable year, are facing a new year that will bring more regulatory control over their market.

Salomon Brothers Inc.'s disclosure of wrongdoings in Treasury auctions dragged the previously obscure sector of the bond industry into the limelight. The potential for new regulations, a possible shift in the Treasury's borrowing pattern, and the direction of interest rates all pose uncertainties for 1992.

"The only thing the Street doesn't like is unknowns," said Bruce Lakefield, an executive at Lehman Government Securities, an American Express unit.

Close Watch on Legislation

The Salomon scandal ignited a debate over whether the relatively free-wheeling government securities market needed its wings clipped by tighter regulation.

However, dealers are hopeful that any new regulations will not change the essence of the way business is done.

"The assumption is next year will be a year for government securities legislation to be passed," said Kenneth deRegt, managing director at Morgan Stanley & Co. "I think the assumption most people have is the system won't change significantly."

The November U.S. elections may also divert attention.

Rates Trending Downward

Some people believe "it's an election year and this is old news - it will all go by the wayside," said Paul McCormack, a manager at Chase Securities Inc., a Chase Manhattan Corp. unit.

Despite being under Washington's microscope, government securities dealers were profitable in 1991 because of the clear trend to lower rates.

"I assume 1991 will be a record or near record year," Mr. deRegt said.

The direction of interest rates becomes fuzzy in the New Year, with many economists expecting rates to bottom at midyear.

Deficit Brings Opportunities

Dealers certainly will have enough wares to peddle with the U.S. needing to finance a $350 billion deficit.

How the Treasury chooses to arrange its borrowing has created some anxiety in the dealer community.

Treasury Secretary Nicholas Brady has said his department is looking at shifting some of the borrowing from long-term bonds into shorter maturities.

Such uncertainty can tie a trader in knots. If a trader sells bonds and Treasury reduces bond issuance, the position will lose money. If a trader buys bonds and Treasury says there is no change, that position also loses.

"If they start messing around with the financing calendar and cut bonds - that's a problem," a head trader said.

Consolidation

The business is also expected to consolidate further, with more primary dropouts likely.

The ranks of the 39 primary dealers will be thinned by at least one in 1992 after the merger of Chemical Banking Corp. and Manufacturers Hanover Corp. combines the two banks' dealerships.

"I think there is more consolidation ahead of us" in the industry, said William Pike, who will head Chemical Securities Inc., the primary dealer formed from the merger.

"Increased regulation tends to lead to increased expenses not necessarily accompanied by increased revenues. Profitability becomes challenging."

GOVPX Inc., which brought live government securities prices to a wider audience in June, is considering extending its system to agencies and zero coupon bonds.

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