Economic Commentary - Participants in the Government Securities Market and Proposed Regulation

Sep 21, 2026

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Economic Commentary examines the participants in the U.S. government securities market and evaluates the case for minimum regulation. It explains how failures of unregulated firms in the 1980s produced direct losses to counterparties and indirect effects on taxpayers, the dollar’s value, savings and loan institutions, and confidence in deposit insurance. It then details the roles of the Treasury, Federal Reserve, primary and secondary dealers, and outlines proposed legislation to prevent systemic repercussions while avoiding excessive regulation.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

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Participants

The Government Securities Market and Proposed Regulation

ECONOMICCOMMENTARY The failure of several unregulatedgovernment securities dealers since1982 has led to pressure for at leastminimum regulation of this market. According to some estimates,thefailures in 1985 of just two governmentsecurities firms,E.S.M.GovernmentSecurities Inc.(ESM)and Bevill,Bresler and Schulman Asset Manage-ment Corp.,caused losses of over $500million to those who dealt directly withthem.Losses also were sustained indi-rectly by individuals who never trans-acted business with ESM,includingtaxpayers of municipalities such asToledo,Ohio.The failure of ESM alsoproduced a temporary decline in theforeign exchange value of the dollar,ledto the temporary closing of 70 privatelyinsured savings and loan associationsin Ohio,and contributed to a subse-quent loss of confidence in private de-posit insurance systems in other states. The problems and issues raised bycalls for new laws to regulate themarket are worth examining becausethe government securities market,where an estimated $225 billion worthof .transactions occur per day,plays akey role in our economy.The market,for example,provides liquidity to ourdomestic banking system.Governmentsecurities—that is,the bills,notes,andbonds that are IOUs of the Treasury orof other government agencies—can besold by banks to raise cash.The mar-ket is also important to fiscal policybecause the federal government usesthe sale of securities to finance budgetdeficits and to meet seasonal shortfallsbetween receipts and expenditures.Finally,the market also is used by the JamesJ.Balazsy,Jr.is a research assistant at the Federal Reserve Bank of Cleveland.The author would like to thank Walker Todd,Mark SnidermanOwen Humpage.Sarah Jaquay,and James Hoehn for their helpful comments. The vieus stated herein are those of the aathorand not necessarily /hose of the Federal ReserteBank of Cleveland or of the Board of Governors ofthe Federal Reserve System. Federal Reserve Bank of New York(FRBNY)to implement the Federal Re-serve's monetary policy.The New Yorkbank,through its trading desk,influ-ences the nation's supply of bankreserves by buying or selling largeamounts of government securities. Proposed legislation would bring themarket under closer regulation in aneffort to prevent future failures ofgovernment securities firms that couldhave repercussions throughout thefinancial system and that could inhibitthe conduct of domestic monetary andfiscal policies. This Economic Commentary exam-ines the participants in the governmentsecurities market,and discusses thedesirability of minimum regulation,theimportance of avoiding excessive regu-lation,and recent proposals to regulatethe market. # Participants Besides investors,participants in thegovernment securities market includethe Treasury Department,the FederalReserve System,and primary andsecondary dealers. The Treasury Department,throughits fiscal agent,the Federal ReserveBank of New York,sells governmentsecurities at competitiveauctions.Mostof the trading in government securitiesis done by government securities deal-ers who are individuals or corporationswho trade government securities fortheir own account. # The GovernmentSecurities Marketand ProposedRegulation by JamesJ.Balazsy,Jr. Primary dealers are those with whomthe FRBNY is willing to deal when con-ducting the Federal Reserve's monetarypolicy.Currently,there are 36 primarydealers who are so designated if theymeet certain criteria outlined by theFederal Reserve Bank of New York. Despite the lack of express statutoryauthority,the FRBNY oversees theprimary dealers,who must submitdaily,monthly,and annual reportsshowing their transactions,positionsand capital. In addition to the primary dealers,itis estimated that there are 400 to 500 se-condary dealers in the market.The ex-act number is unknown because thereis no strict definition of a governmentsecurities dealer,and no requirementsfor federal registration.However,se-condary dealers are important to themarke

FAQs

Why is regulation of the government securities market considered necessary?

Failures of unregulated government securities dealers created large losses and broader indirect repercussions, motivating calls for at least minimum regulation to help prevent future failures with systemic effects.

Who participates in the government securities market besides investors?

Participants include the Treasury Department, the Federal Reserve System, and primary and secondary dealers.

What are primary dealers and how are they overseen?

Primary dealers are firms the FRBNY is willing to deal with when conducting monetary policy. They must meet criteria and submit daily, monthly, and annual reports on transactions, positions, and capital.

Sep 21, 2026

Upload by Finn