US Federal Reserve in talks to add more primary dealers

The Federal Reserve Bank of New York is in talks with at least four firms to expand the network of dealers that underwrite government-bond auctions as the US prepares to sell more than $2 trillion in debt this year.

MF Global Ltd and Nomura Securities International Inc are in discussions to join the 16 so-called primary dealers that trade directly with the central bank and are required to bid at auctions, officials at the companies said. RBC Capital Markets, the investment-banking arm of Canada's biggest bank, and Jefferies & Co, a brokerage for institutional investors, are in negotiations, according to people familiar with the process. Treasury Department and Fed officials want to ensure there are enough firms bidding at auctions to keep borrowing costs low after the total number of dealers dropped last year to the lowest amount since the network was formalized in 1960. The Treasury Borrowing Advisory Committee, a market group that works with the central bank, wrote in a memo released Feb 4 that more dealers would reduce "the possibility of an undersubscribed auction".

"With the contraction in primary dealers in the marketplace over the past year, clearly there's a need to replace some of them, especially with the increased issuance coming out of the Treasury," said Donald Galante, a senior vice president in New York at MF Global, which he said is in talks with the central bank about a dealership position. Nomura, a unit of Japan's largest securities firm, has applied to the Fed, said Ralph Piscitelli, a New York-based spokesman for the firm.