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R&S 100-172U
October 15, 19U5


Board of Governors


Government security dealers

Prom: L. M. Piser
Several matters relating to Government security dealers were discussed in a letter dated September 11, I9I4I*, from Chairman Eccles to Mr. Sproul
and by the Chairman at the meeting of the Executive Committee on September 21,
I I I . Three of these matters have been settled since that time. First, the
members of the Executive Committee have received an analysis of the dealers who
failed to qualify. Second, they have received each month a report showing the
amount of transactions for the System Account with each dealer and broker. Third,
Mrt Rouse reported that the New York Reserve Banlc has exacburaged the dealers
individually to adopt desirable rules of conduct and has encouraged the dealer
group to strengthen its organization and to endeavor to eliminate market practices
that cause criticism.
The remaining four matters, however, have not been settled*
the Chairman suggested that the Executive Committee be advised of any instances
when the position of a dealer reaches an abnormally high level, of any action
that is taken by the New York Bonk regarding the position of a dealer, and of
the response by the dealer to this action. The Chairman also mentioned that
the earlier drafts of the dealer terms included a provision that the amount of
borrowings by any dealer should not exceed ten times his net worthy that this
provision subsequently was disoarded on the grounds that the objective could
better be attained by continuing the existing informal supervision over the
positions of dealers, and that, although ten times the net worth of a dealer
might not be a satisfactory measure, some maximum should be established and
any instances when that maximum is exceeded should be reported to the Executive
Committee• Mr. Ro\isefs reply to this suggestion was that the amount of dealer
borrowings should not be limited by any rule or regulation and thatf on matters
of general policy such as this, the Executive Committee should, in his opinion,
express its views and should make the details of the application of such policy
a responsibility of the Bank.
Second, the Chairman suggested that the Executive Committee recognize at least informally the present commission of l/6U of a point on transactions with dealers for the System Account in notes and bonds and the present
limitation to exceptional cases of transactions in these securities on a net
basis and that the Executive Committee establish a commission of perhaps 0,01
per cent on transactions in certificates. Regarding the latter part of this
suggestion, Mr. Rouse felt that a differential of 0f01 per cent, while satisfactory on the longer maturities of certificates, would not permit the dealers
to make a reasonable profit on the shorter maturities., He suggested that, if
the Executive Committee wants to issue formal instructions, the instructions
be sufficiently broad to permit the Bank to operate within the range of a maximum commission, rather than at set commissions for each type of security, and
that the instructions limit the commission to no more than l/32 of a point.


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R&S 100-1721;
October 15, I9JU5

Third, the Chairman suggested that the annual statements of condition of qualified dealers and brokers include the following items* (1) holdings of Government securities, by issues, (2) Government securities borrowed,
by issues* (3) borrowings from banks, trust companies, and other financial
'institutions, ( 4 ) borrowings from officers and directors, (5) borrowings from
others, (6) loans to officers and directors, and (7) net worth* In reply
Mr. Rouse said that* with the exception of the detailed lists of securities
owned and securities borrowed, all of the suggested information ordinarily is
obtainable from the annual statements and that the dealers1 long and short
positions by groups of issues are reported to the Bank on a daily basis. He
said that, if the Executive Committee so desires, he would be glad to forward
copies of the financial statements and of the analyses prepared by the Credit
Department of the Bank,
Finally, the Chairman suggested that the Reserve Bank Presidents be
requested to furnish to the Executive Committee a record of any information
that they may obtain in the future regarding violation by dealers of the terms,
Such a record would include information that dealers have induced customers to
sell when purchases were being made for the System Account, that dealers have
made recommendations to customers that had the effect of disturbing the market,
and that dealers have manipulated quotations in order to increase their transactions. In reply Mr* Rouse suggested that, if such reports are made, they
should be authenticated in so far as possible and forwarded to the Bank for
further investigation*