By Jonathan Spicer
NEW YORK Feb 20 The Federal Reserve will buy
bonds from a larger group of broker-dealers under a one-year
pilot program meant to strengthen the U.S. central bank's direct
involvement in financial markets.
The Federal Reserve Bank of New York, which carries out the
Fed's monthly purchase of $85 billion in Treasury and mortgage
bonds, now does direct business with 21 so-called primary
dealers such as JPMorgan Chase & Co and UBS AG
Under the pilot, the New York Fed said it will widen that
supply chain so that up to five more smaller dealers can compete
for the business, and so that it can augment "operational
capacity and resiliency in its monetary policy operations."
The Fed bank outlined requirements for new broker dealers
and invited them to apply for the pilot. Firms involved in the
pilot will not automatically become primary dealers in the
future, and would have to re-apply for any permanent program.
The Fed plans to announce the names of the new dealers later
this year, and wants to run the program for about a year.
There is no connection between the length of the program and
the future path of U.S. monetary policy, the New York Fed said
in a statement. A spokesman said the move is not a sign that the
21 primary dealers are not meeting the Fed's needs in the bond
In an unprecedented drive to spur U.S. economic growth after
the worst recession in decades, the Fed since late 2008 has
bought some $2.5 trillion in longer-term bonds.
As it stands, the New York Fed's trading desk buys $45
billion in Treasuries and $40 billion in mortgage-backed
securities per month under the third round of quantitative
easing, dubbed QE3. Dealers submit quotes each day, after which
the Fed outlines its trading activity.
The pilot program is being launched "to continue to explore
the effectiveness and feasibility of expanding operations to a
broader range of counterparties," the Fed bank said.
Eligible dealers must have net regulatory capital of between
$1 million and $50 million, among other requirements.