(Corrects spelling of Jon Corzine's name)
* Implications for primary dealer applicants unknown
* Fed may need more primary dealers to carry out "Twist"
* One former official says occasional failure is normal
By Emily Flitter
NEW YORK, Oct 31 Perhaps Wall Street will
finally listen to the New York Fed's regular warnings about
primary dealers: Just because they are approved to work
directly with the government, that doesn't make them safe.
MF Global Holdings Ltd MF.N, just nine months after
ascending to the list of primary dealers who transact business
directly with the Fed, filed for Chapter 11 bankruptcy on
Monday. For details, see: [ID:nN1E79U0V8]
The Federal Reserve Bank of New York has long claimed in
public statements that its bestowal of "primary dealer" status
upon a securities firm "in no way constitutes a public
endorsement of that entity by the New York Fed, nor should such
designation be viewed as a replacement for prudent counterparty
risk management and due diligence."
Yet banks and securities dealers have clamored for the
status, not because being a primary dealer is a lucrative
business but because it is as a sign that the firm is in the
"Talk about egg on the face of the Fed," said Joshua
Rosner, managing director of Graham Fisher & Co, an independent
research consultancy. "A primary broker is supposed to be of
But it's possible New York Fed officials are taking MF
Global's failure in stride:
"If nobody ever drops off the list for financial reasons,
maybe you're being too stringent," said one former New York Fed
official who did not wish to be named.
The bankruptcy does raise questions, however, about how the
Fed picks the primary dealers -- especially since MF Global was
one of four firms added to the ranks after new, more stringent
requirements were put in effect in 2010.
A spokesman for the New York Fed declined to comment.
The New York Fed heavily scrutinizes applicants for primary
dealer status and holds primary dealers, which help distribute
U.S. debt and carry out monetary policy, to capital
requirements other securities firms do not necessarily have to
In the wake of MF Global's failure, other applicants for
primary dealer status are wondering what the New York Fed will
do differently in the future.
"My guess is there probably will be a pause in the
application and approval process while they figure out what
went wrong and what they're going to do, if anything," said
Douglas Landy, a former New York Fed lawyer who is now a
partner at Allen & Overy.
That may slow the already clogged pipeline of primary
dealer hopefuls. TD Securities, for instance, has been waiting
since early 2009 for its application to go through. Pierpont
Securities and CRT Capital Group have been waiting more than a
Despite new application guidelines the New York Fed
released in 2010, there is still some mystery to the process.
MF Global won approval in February despite its reputation for
taking big risks.
"I think they stood out a little bit before," said Otis
Casey, director of credit research at Markit. "I don't know to
what extent their leverage was inside or outside any guidance
from the Fed, but they were highly leveraged compared to
But MF Global was led by a prominent public figure, Jon
Corzine, the former New Jersey senator and governor as well as
former CEO of Goldman Sachs, which may have boosted its
"The principal of MF Global was once the head of government
bond trading at Goldman Sachs in a different era and the firm
may have been cut some slack given who he is," Chris Rupkey,
chief financial economist at Bank of Tokyo-Mitsubishi UFJ in
New York, said in a note to clients.
FILLING OUT THE RANKS
The New York Fed is left with 21 primary dealers with which
to carry out its operations, including the Fed's latest effort
to stimulate the the economy, dubbed "Operation Twist."
The $400 billion program involves selling shorter-dated
Treasury securities from the Fed's balance sheet and using the
proceeds to buy longer-dated notes and bonds. The New York Fed
executes the program, and the primary dealers are its only
Ernest Patrikis, another former New York Fed lawyer, now a
partner at White & Case, said he would advise the primary
dealer applicants still waiting for approval from the New York
Fed to renew their efforts.
"Call the Fed and say you're ready," Patrikis said.
(Additional reporting by Kristina Cooke Chris Reese and Pedro
Nicolaci da Costa; Editing by Dan Grebler)