UPDATE 1-TD Bank in talks to become primary dealer - source

(Adds details, background on primary dealers, byline)

By Mary Angela Rowe

NEW YORK, July 8 (Reuters) - Canada's Toronto Dominion Bank (TD.TO) is in talks with the U.S. Federal Reserve about becoming a primary dealer, a source at the bank said on Wednesday.

If approved, TD Bank would be the second Canadian bank, following Royal Bank of Canada (RY.TO) on Tuesday, to be added to the network of top institutions that deal directly with the Fed, the U.S. central bank.

A representative of TD Bank was not immediately available for comment, and the New York Fed declined to comment.

Primary dealers are required to bid at Treasury auctions, and the Fed consults with them as it gathers market intelligence.

The number of primary dealers recently shrank to a record low of 16 during the financial crisis, at a time when a wave of government debt issuance looms to fund economic rescue programs. Currently there are 17 dealers.

In a February report, the Treasury Borrowing Advisory Committee said a larger primary dealer community would help to "reduce the possibility of an undersubscribed auction." The number of dealers peaked at 46 in the late 1980s.

Other institutions are also likely to join the group. Futures and options broker MF Global Ltd (MF.N) and Japanese bank Nomura Holdings Inc (8604.T) said this year they were in talks with the Fed but have given no updates since then.

Mid-sized U.S. investment bank Jefferies & Co (JEF.N) was added in June.

Potential dealers must qualify in terms of reputation, capacity and adequacy of staff and facilities.

The radical reshaping of Wall Street sparked by the global financial crisis hit the primary dealer network hard, with Countrywide, Lehman Brothers (LEHMQ.PK), Merrill Lynch, Dresdner Kleinwort and Bear Stearns all dropping off the list. (Reporting by Mary Angela Rowe; Editing by James Dalgleish)