U.S. Government Securities:

Dealer Views on Market Operations and Federal Reserve Oversight

GGD-86-147FS: Published: Sep 29, 1986. Publicly Released: Sep 29, 1986.

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In response to a congressional request, GAO reviewed the Federal Reserve System's oversight of the U.S. government securities market, specifically: (1) the impact of recent dealer failures and other market disturbances; (2) the effectiveness of the Federal Reserve Bank of New York's (FRBNY) market oversight; (3) whether there is a need for new federal regulation of the U.S. government securities market; (4) FRBNY voluntary capital adequacy guidelines for dealers not subject to federal regulatory oversight; (5) the structure and function of the U.S. government securities market; and (6) access to inter-dealer broker wires.

GAO found that: (1) dealer failures and other disturbances have not affected most dealers' profitability; (2) many market changes since 1982 have effectively reduced the potential for future disturbances; (3) FRBNY adequately administered its analysis of reports and capital adequacy, but it should increase its surveillance of over-the-counter trading in forwards and options, interest rate and currency swaps, and settlement of mortgage-backed securities; (4) the Reserve's standards for designating primary dealers was highly relevant to the securities market's efficient functioning; (5) FRBNY oversight of primary dealers decreased their need for credit checks of trading partner; (6) U.S. government securities should continue to be exempted from federal regulation but, if regulation occurs, it should include capital adequacy requirements, provisions for dealer registration, recordkeeping requirements, and custodial requirements; (7) many dealers transacted business with unregulated securities dealers without requesting certification of compliance with FRBNY capital adequacy guidelines; (8) in evaluating their trading partners' creditworthiness, dealers emphasized knowledge of principals and management, audited annual financial statements, guarantees from parents or affiliates, and primary dealer designations; and (9) dealers disagreed on the extent to which access to inter-dealer brokers' wires represented a competitive advantage.

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