Activity

Primary dealers are a group of financial institutions authorized to trade directly with the Federal Reserve Bank of New York in its open market operations. While they are key participants in the U.S. Treasury market, the actual clearing and settlement of U.S. Treasury securities primarily takes place through a central counterparty (CCP).
The Fixed Income Clearing Corporation (FICC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC), is the primary clearing agency for U.S. Treasury securities. FICC’s Government Securities Division (GSD) provides central counterparty (CCP) services, including:
* Trade matching and netting: FICC matches trades and nets down obligations among its members, significantly reducing the number of individual settlements.
* Risk management: As a CCP, FICC guarantees the settlement of trades even if one party defaults, thereby mitigating counterparty risk.
* Collateral management: FICC manages collateral from its members to cover potential exposures.
How Primary Dealers Interact with Clearing and Settlement:
Primary dealers are typically direct participants (members) of FICC’s GSD. This means they utilize FICC’s services to clear and settle their U.S. Treasury transactions. While primary dealers are major players in the market and contribute to its liquidity, they rely on FICC for the actual clearing and settlement infrastructure.
Some primary dealers may also offer “done-away” clearing models or act as “sponsoring members” or “agent clearers” for other market participants who don’t have direct access to FICC. This allows a broader range of entities to benefit from FICC’s central clearing services.
Key Takeaway:
While primary dealers are vital to the U.S. Treasury market, the central clearing and settlement services for these securities are predominantly provided by the Fixed Income Clearing Corporation (FICC). Primary dealers are generally direct members of FICC and use its services for their clearing and settlement needs.

Video courtesy of First Bank of Nigeria

Video courtesy of First Bank of Nigeria