* Treasury, repo market liquidity boosted by more dealers
* French primary dealers under stress from euro zone woes
* Unlikely that NY Fed rushed its approval for BMO, Scotia
By Emily Flitter
NEW YORK, Oct 5 Fed watchers and market
participants praised the Federal Reserve Bank of New York for
its good timing after the New York Fed on Tuesday designated
two Canadian banks as primary dealers.
Analysts said on Wednesday the New York Fed's addition of
two new primary dealers to the list will help keep the Treasury
market and other short-term rates markets liquid, and is
especially crucial as French banks continue to grapple with the
euro zone debt crisis.
Primary dealers are the financial firms authorized to help
the Federal Reserve carry out monetary policy and to bid
directly at Treasury auctions on behalf of clients. The number
of primary dealers once neared 40, but there are currently 22
on the list, counting the newest additions.
Two French banks that have struggled recently, Societe
Generale (SOGN.PA) and BNP Paribas (BNPP.PA), operate
securities firms that are designated as primary dealers.
While there is no indication that SocGen's and BNP's
problems are serious enough to jeopardize their primary dealer
status just yet, they would exit the list de facto if they
failed and likely also if they had to merge with other banks.
"The deterioration in market confidence is having real
consequences, as illustrated by the delevering plans put
forward by BNP, SocGen and Credit Agricole," wrote Goldman
Sachs analyst Jean-Francois Neuez in a note to clients on
By contrast, the newcomers, Bank of Montreal (BMO.TO) and
Bank of Nova Scotia (BNS.TO), are at least for the moment
pictures of stability. Bank of Nova Scotia actually runs its
primary dealership directly rather than operating a separate
securities dealing subsidiary,
"I see adding the Canadian banks as being favorable because
they've had a much more stable environment -- they haven't been
affected by the crisis swirling around them," said Marty Mosby,
a managing director at Guggenheim Securities in Memphis who
covers banks stocks. "You're not in a position of being
stressed by the environment."
The New York Fed declined to comment.
SAFETY SOUGHT IN MONEY MARKETS
The money markets contain plenty of sources of stress. Repo
rates rose on Wednesday, but demand for Treasury bills as repo
collateral remained very high, according to Roseanne Briggen,
an analyst at IFR, a unit of ThomsonReuters, in New York.
"People are nervous about French banks and counterparty
risk," Briggen said.
"As an investor if you've got cash you may not want to buy
a bank CD. So you want it to be in a very safe place so you can
put it in the repo market. You get the T-bills versus the cash
you've been putting in."
Briggen said losing primary dealers would decrease the
liquidity in the repo market, as well as in the Treasury
"If you are a primary dealer, you have a bigger repo book,
so that adds some liquidity. Your desk is going to be more
involved in the auctions. The whole thing is liquidity --
that's what the dealers do -- so the more the merrier," she
That's not to say the New York Fed rushed through the
primary dealer approval processes for BMO or ScotiaBank
specifically because it was worried about France's banks.
"It takes a good 12 to 24 months to become a primary
dealer, because it takes a long time for the Fed markets desk
to get comfortable with a new firm," said Douglas Landy, a
partner at Allen & Overy and a former New York Fed lawyer. They
run you through a lot of tests."
But Landy said even though the New York Fed's specific
approval timeline might not have changed, adding new primary
dealers was still a smart move.
"I do think they're always worried about mergers or
failures closing the number of primary dealers down to a few,"
he said, adding that the two Canadian banks' businesses looked
simpler than some of the other securities dealers that have
recently joined the primary dealer list.
"They've already let in the unconventional ones like Cantor
Fitzgerald, Jefferies & Co. and MF Global," he said.
(Editing by Leslie Adler)