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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL
October 17, 1952
(For use of the ad hoc Subcommittee on
Study of the Government Securities
Market, Federal Open Market Committee)
•Copy
JL
FEDERAL OPEN MARKET COMMITTEE RELATIONSHIP WITH
BROKERS AND DEALERS IN GOVERNMENT SECURITIES
Digest Review from Federal Open Market
Committee Minutes and Files, 19l4;-195>2
Introduction
The steadily mounting volume of System transactions in Government securities during the war period gave rise to a growing concern on
the part of the Federal Open Market Committee about the Committee's relationships with brokers and dealers in Government securities. In May 1914;
the Committee, after extensive consideration of this problem, decided to
formalize relationships with brokers and dealers transacting business for
the System account. This digest reviews the Committee's record with
respect to these relationships just prior to and since the formalization
action.
The record begins with an informal conference of the executive
committee on February 21, 19Ui«
Informal Conference of the Executive Committee, February 21, 19UU
At the executive committee's previous meeting, Mr. Rouse had
been requested to prepare a memorandum submitting a report and recommendations regarding relationships between the Federal Reserve Bank of New York
and dealers in United States Government securities.
The main points of
the memorandum prepared by Mr. Rouse in response to this request were as
follows:
First, the System has no express or implied statutory authority
to regulate the Government security market. Second, Government securities
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-2-
were specifically exempted from regulation by Congress when the Securities
and Exchange Commission was established.
Third, the System could be
accused of price-fixing, and dealers could be accused of violating the
anti-trust laws.
Fourth, all transactions by the System should be effect-
ed in a manner that protects the System and the public without favoritism.
Fifth, it is not vital to dealers to comply with requests of the Reserve
Bank, since their transactions with the Reserve Bank represent only about
7 per cent of the total business of such dealers. If numerous conditions
were imposed upon the dealers, they would probably go a long way to comply,
particularly during the war, because they believe that the Reserve Bank,
representing the Federal Open Market Committee and the Treasury, is endeavoring in the public interest to exercise a beneficial influence on the
market, but it would be primarily for that reason and not because they believe that the business is vital to their continued operation.
It was recommended in the memorandum that the Federal Open Market Committee (l) approve a statement of policy that transactions be effected through or with dealers or brokers who have agreed to requirements prescribed by the Committee, (2) prescribe in broad language certain criteria
to be followed in the selection of brokers and dealers, and (3) determine
that every broker and dealer enter into certain undertakings with the
Reserve Bank. In extending recognition to a dealer, the Bank would take
into consideration (l) integrity, knowledge, and capacity and experience
of management, (2) willingness to make markets arid to take positions, (3)
volume and scope of business, (U) cooperation in the maintenance of an
orderly market, and (5) financial condition and capital at risk of business. In addition, it was recommended that each dealer furnish the Bank
each day with a statement showing the borrowings, position, and volume of
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Federal Reserve Bank of St. Louis
-3transactions and such other data as in the opinion of the Bank will aid
in the execution of transactions for the System.
Dealers also would be
required to give written notification of whether they executed each transaction with the Bank as a broker or as a dealer, to make deliveries by a
specified time, to furnish an annual statement of financial condition, and
to refuse to solicit offers or bids for the purpose of selling to or buy,-
ing from the Bank. Any dealer violating this agreement would befsubject
to removal from the recognized list,
The suggestions contained in Mr. Rouse's memorandum, together
with a draft statement incorporating these and other staff suggestions
prepared by Messrs. Wyatt, Piser, and Kennedy, were discussed at length.
At the conclusion of the meeting it was understood that Messrs. Sproul
and Rouse would study the matter in the light of this discussion with a
view to proposing a statement of the conditions under which the New York
Bank, as agent for the Federal Open Market Committee, would deal with
brokers and dealers.
It was also understood, in studying the matter, that
Messrs. Sproul and Rouse would give particular consideration to (l) the
desirability of establishing at the Federal Reserve Banks and their branches
facilities for the purchase and sale of Government securities, and (2) the
advisability of making reference in the Board's annual report to the problem
presented to the Federal Open Market Committee in connection with its relationships with dealers in Government securities.
Executive Committee Meeting, February 299 l$kk
The proposed statement of terms on which the open market account
would transact its business with a Government security dealer as submitted
to this meeting was patterned after the suggestions discussed at the
executive committee's informal conference. The statement contemplated that
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Federal Reserve Bank of St. Louis
-llthe executive committee's instructions to the New York Bank would include
a directive that the Bank vrould decline to transact any further business
with a broker or dealer who willfully violated or failed to perform any
of the proposed terms or conditions.
An exception was provided in case
the Bank was satisfied that the broker or dealer had taken steps to correct the default and prevent its future occurrence.
Chairman Eccles sug-
gested that it be understood that, if a broker or dealer were disqualified because of any such violation, he would not again be qualified without the approval of the executive committee.
At the conclusion of the discussion, the committee unanimously
voted approval of a statement of terms and conditions under which brokers
and dealers would be qualified to transact business for the System open
market account.
It was understood that the full Open Market Committee
would be requested to adopt these terms and to authorize the executive
committee to (1) make minor changes in the statement if it appeared desirable following discussion at the full Committee meeting, (2) make the
terms effective at such time as in the judgment of the executive committee
appeared desirable, and (3) issue such instructions to the New York Bank
in connection therewith as might be required. It was agreed that the suggested terms would be applicable to all representatives and agents of
qualified brokers and dealers.
The full statement of the terms under which brokers and dealers
would be qualified, together with pertinent correspondence on this subject,
is attached to this report as Appendix A.
Meeting of the Federal Open Market Committee, February 29,_IffUU
Chairman Eccles reported that in a meeting just before this
meeting the executive committee had approved a recommendation to the full
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Committee with respect to the terms under which brokers and dealers would
be qualified to transact business for the System open market account. The
recommendation of the executive committee was read and discussed by the
full Committee.
Chaiman Eccles stated that other ways which had been
discussed of dealing with the problem of the System's relationship with
the market included (1) establishment at the Federal Reserve Banks and
branches of an organization to handle purchases and sales of Government
securities directly with customers, (2) adoption of a policy requiring
that transactions handled by dealers for the System account be on a brokerage basis only, and (3) inclusion in the Board's annual report to Congress
of a statement of the problem created by the present situation in which
there is no express statutory basis upon which dealers in Government securities can be subjected to adequate regulation.
He further stated that the
executive committee felt that its recommendation was the most satisfactory
for the present, although it might be necessary at a later date to consider
modification of the procedure or adoption of an alternative.
Mr. McLarin inquired v/hether dealer banks in cities other than
New York and Chicago could qualify under the proposed terms.
Mr* Rouse
replied affirmatively, but stated that it was not expected that many such
banks would be interested in qualifying.
Mr. Davis asked whether it was the intention under the recommendation to qualify all who met the proposed requirements or only brokers
or dealers presently having relationships with the New York Bank. Mr.
Rouse replied that the former was intended, and the Committee agreed that
the final statement should make this point entirely clear.
In discussing the steps to be taken to put the procedure into
effect, the Committee unanimously approved Mr, Sproul's suggestion that
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-6the Treasury be informed of the proposed action so that any objections
that the Treasury might have could be considered before any such arrangement was put into effect.
At the conclusion of the discussion, the Committee unanimously
voted to approve the proposed terms and also to approve the amendatory
and enabling suggestions noted at the end of the executive committee meeting on this same date.
Executive Committee Meeting, March 28s 1914+
In accordance with the authority granted at the meetings of
the full Committee on February 29 and March 1, 19kk> the executive committee approved a revised statement of the terms under "which brokers and
dealers could qualify to do business with the System open market account.
It was noted that a copy of the statement of terms had been sent to the
Treasury on March 21,
A suggested letter of instructions from the executive committee
to the Federal Reserve Bank of New York was considered. The letter of
instructions to the New York Bank and the informatory letter to the
Presidents of the other Federal Reserve Banks are included under Appendix A, together with the terms of dealer qualifications referred to in
the meeting of February 29, 1914*.
Executive Committee Meeting, May 1;, 19 UU
Chairman Eccles reported that on April 7f 19l4ij Under Secretary
of the Treasury Bell acknowledged receipt of the letter sent by the committee to Secretary llorgenthau on March 21, 19hh9 transmitting the statement of terms under which the System would transact business with brokers
and dealers for the System account. Mr. Bell had stated that the Treasury
was vitally interested in some of the proposals and he would like to
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-7Yrithhold comments until his return from a week's vacation, at which time
he Y/ould discuss the matter with Chairman Eccles.
Subsequently, l.Ir. Bell
had stated that he would send a letter to the Federal Open Market Committee regarding the matter, but despite an urgent request by Chairman
Eccles that such a letter be submitted promptly nothing had been heard
for two weeks.
Chairman Eccles Y/as of the opinion that no further com-
ment would be received from the Treasury and that there was no reason for
further delay in putting the proposed terms into effect.
The other members of the executive committee agreed with this
opinion and unanimously voted to approve and transmit to the New York
Bank and the other Federal Reserve Banks the two letters approved at the
meeting on Llarch 28, 19lUi, with the understanding that the terms would
be made effective on Hay l£> 19UU.
Letter to Chairman Eccles from the Under Secretary of the Treasury?
May 11, iWT
Subsequent to this action and with informal advice that it had
been taken, Mr. Bell addressed a letter, dated May 11, 19 hk* to Chairman
Eccles, expressing the following views on the matter of formalizing System
account relations with Government security dealers:
"I have some grave doubts as to the wisdom of formalizing
the procedures covering the business transacted between brokers
and dealers and the Federal Reserve Bank of New York. I appreciate that this only covers the System's Open Market Account,
but the Bank does buy and sell securities in the market involving these same people for account of the Treasury's investment
funds. Possibly the Bank can handle your transactions on a
formal basis and ours on an informal. We do not feel here in
the Treasury that any such formal arrangement is necessary.
"Furthermore, it runs the chance of being severely criticized by newspapers and you may be charged with attempting to
control the operations of these firms. I feel that the present system has worked very well and can be explained to anyone
interested in the procedure."
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Federal Reserve Bank of St. Louis
-8Executive Committee Meeting, July 28, 19hh
Prior to this meeting there had been an exchange of letters
between Secretary Merrill and Mr. Sproul (Appendix A) regarding the matter of putting into effect the terms of conditions under vjhich brokers
and dealers vrould be qualified to do business with the System account.
In discussing the reaction to the formalized procedure, Mr.
Rouse stated that the terms had been accepted without question and had
worked very well, and that the Bank had received several inquiries from
firms which were considering entering the field. He reported that
Schroder Rockefeller & Co. had already gone in the business and, in
answer to their inquiry, had been informed that when the officers of the
firm felt that the terms of qualification could be met they should communicate with the Federal Reserve Bank of New York. He also reported
that the officers of the Company felt that the firm should have further
experience before undertaking to comply -with the terms of qualification.
Executive Committee Meeting, September 21, 1914;
Chairman Eccles suggested that consideration be given at some
stage as to whether the annual statements of condition submitted by qualified brokers and dealers should be expanded to show holdings of Government securities by issues; Government securities borrowed by issues; borrowings from banks, trust companies, and other financial institutions,
and from officers, directors, and others; loans to officers and directors;
and net vrorth. He felt this would provide a better basis for appraisal of
the condition of the qualified firms. He further suggested that consideration be given to commissions paid dealers in connection Yfith transactions
for the System account.
To the latter question, Ivlr. Sproul suggested that
Ur. Rouse study the matter and submit a report to the next meeting of the
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i
-9-
exe cutive committee.
Chairman Eccles further suggested that consideration be given to
the desirability of having the various Federal Reserve Bank Presidents
report on any cases that came to their attention "where representatives of
any of the qualified dealers violated the terms under which they agreed
to transact business for the System account.
Interim Developments
In a letter to Mr. Sproul dated September 11, 19hh} Chairman
Eccles raised certain questions with respect to brokers and dealers in
Government securities, such as: the adequacy of information supplied to
the executive committee concerning dealers who failed to qualify; reporting on additions to or removals from the qualified list; the matter of
maximum borrowing of any one dealer; and reporting on the volume of transactions for the System account with each qualified dealer.
These questions were discussed at the executive committee meeting on September 2L, 19hh> and a number of additional points were raised
at that time.
In the light of Mr. Eccles1 letter and this discussion,
LIT. Rouse, in a letter dated October 11, 19 Ml* reported on brokers and
dealers who had not qualified under the new terms, and, in a further memorandum dated November 1, reported on dealer commissions on transactions
for the System account and related matters pertaining to dealer activities.
Mr. Piser addressed a memorandum to the Board of Governors, dated
February 8, 19U£j bringing to their attention questions which, in the light
of this background, seemed to require further consideration.
At the
February 28, 19li5> meeting of the executive committee, reference was made
to these questions, but discussion was deferred.
At the four succeeding
executive committee meetings, the unsettled problems mentioned in Mr. Piser1s
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Federal Reserve Bank of St. Louis
-10memorandum of February 8, 19U£, were mentioned, but, owing to the pressure
of other business, were not discussed.
Copies of the letters and memoranda pertaining to these questions are included in Appendix B attached.
Executive Committee Ileeting, February 28, 19U6
A memorandum prepared by Mr. Piser under date of October l£,
19Wj restating the substance of his earlier memorandum of February 8,
19ii5, posed four questions for discussion. These were:
(l) whether the
executive committee should be advised of any instance in which a qualified dealer's position reached an abnormally high level, of any action
taken by the New York Bank regarding that position, and of the dealer's
response to this action; (2) whether the executive committee should recognize the present commission of 1/6U of a point in notes and bonds on transactions for the System account and the present limitation to exceptional
cases of transactions made on a net basis, and whether the executive committee should establish a commission of 0.01 per cent on transactions in
certificates; (3) whether annual statements of condition submitted by
qualified dealers and brokers should include certain, additional information; and (U) whether Reserve Bank Presidents should be requested to furnish information regarding violations of established terms by recognized
dealers.
In regard to the first question^ Mr. Rouse stated that difficulties might be involved in establishing a maximum position that an
individual dealer might take.
Chairman Eccles commented that under pres-
ent conditions it would be better if the dealers did not take positions
and securities were purchased or sold directly to and from the Federal
Reserve Banks. Mr, Rouse stated that, with one exception, there had been
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-lino cases of overextended positions that would have been reported to the
executive committee3 and that in the exceptional case the management of
the firm involved had been changed and the situation subsequently corrected.
He also feared that if a maximum position were fixed the dealers
might take it as an invitation to go to that limit.
Chairman Eccles felt that the Open Market Committee had responsibility for market conditions and that there should be reports of dealers'
positions as well as any actions by dealers that would be adverse to the
proper discharge of that responsibility. As a guide to the manager of
the account, he felt a reasonable limitation on dealers' positions should
be established.
Mr. Rouse suggested that it would be possible for him to include
comments in a weekly report which might be helpful, and it was agreed that
further study should be given to this question and a decision readied at
the next meeting.
Mr. Rouse then asked if it was the committee's desire that he
encourage dealers to reduce their positions, and Chairman Eccles stated
that he felt dealers should sell securities to the extent that they could
to keep the market from going higher.
With respect to commissions, Mr. Rouse felt that it would not
be wise to tie the hands of the New York Bank beyond the existing general
understanding that it would not pay more than 1/32 on System transactions,
and that he would desire some over-all instructions that would give more
leeway in operation rather than specifying the commission to be paid on
any given transaction.
Chairman Eccles questioned the need for such lee-
way and further stated that he would like to consider the matter from the
standpoint of the desirability of paying no commissions.
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Federal Reserve Bank of St. Louis
To Mr. Williams'
-12suggestion that the committee's procedure should be such as to keep the
dealer mechanism alive, Chairman Eccles replied that he questioned the
need for the dealers in the present situation.
At the conclusion of the discussion, it was agreed that further consideration would be given to the matter of commissions as well
as to the remaining questions in Mr. Piser's memorandum, so that the
four questions could be disposed of at the next meeting of the committee,
Further Developments
In a letter to the executive committee reporting financial
data on qualified nonbank dealers, dated April 19, 19^6, J-:r. Rouse made
the following observations with respect to dealer positions and borrow-
ing:
"In general the ratio of dealers' borrowings to net
worth appears high. However, we believe that these ratios
under the conditions existing at the end of the year (following the close of the Victory Loan drive) do not necessarily
indicate an overextended position on the part of any dealer,
due to the fact that (l) the dealers1 portfolios included
large amounts of short term issues; (2) the funds borrowed
included large amounts needed temporarily to carry securities sold but not yet delivered (the funds borrowed for the
latter purpose represented up to 30 per cent of the total
amount of funds borrovred on Government securities by individual dealers); and (3) there was a basis for anticipating
that securities would be in demand during January 19U6.
Ir
i/7e were not greatly concerned over the turn of the year
with the large anount of short term issues which the dealers
were carrying as it represented primarily an aid to the market.
Ordinarily dealers, selfishly perhaps, do not care to tie up
capital in carrying excessive amounts of such issues. However,
a problem •yjhich has caused us concern has been the substantial
amount of dealers' holdings of restricted Treasury bonds, not
only for the interest carry, but also the likelihood of capital appreciation. Notwithstanding a number of discussions we
have had with dealers in an attempt to have them supplj7" such
holdings of long bonds to the market at the time of steadily
advancing prices, their positions were not materially reduced
until a period subsequent to the statement date. As a matter
of fact, in some instances dealers' positions in long bonds
have continued to remain relatively large
9
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-13approximately one half of their holdings at the beginning
of April were in 2 1/1; per cent bonds and the balance was
comprised generally of small amounts of the various issues
of 2 1/2 per cent bonds, T7e have not made an issue in the
matter beyond exerting pressure on the dealers to supply
their holdings of bonds to the market, inasmuch as those
with whom we do business for the System Open Llarket a ceo-ant
were in competition with unqualified security houses. In
addition, there has been the difficulty of criticizing a
condition (almost riskless) brought about by Treasury and
System policy. Actually the dealers who are not qualified
to act for System account have been in a preferred position
as far as profits are concerned. If it came to a choice,
it seems entirely possible that some of the qualified dealers would have preferred, under existing conditions, to disregard requests to reduce positions and forego our existing
relationship in -which event their profits would have been
greater."
Executive Committee Meeting, June 10, 19JJ.6
The four questions referred to in the executive committee meeting of February 28 were discussed, and the following suggested solutions
were unanimously approved:
"1. Whether the executive committee should be
advised of any instance in which the position of a
dealer reaches an abnormally high level, of any action taken by the New York Bank regarding the position of a dealer, and of the response by the dealer
to this action.
"The Federal Reserve Bank of New York should include in its
regular weekly report a statement that, during the period covered
by the report, the position and borrowings of individual dealers
or of all dealers combined, in its opinion, had or had not been
excessive as the case might be. In the event the position and
borrowings of an individual dealer or of all dealers taken together were believed to be excessive, the statement should include
a report of any action considered by the New York Bank, the action
taken by the Bank, and the response by the dealer or dealers
thereto.
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Federal Reserve Bank of St. Louis
"2» V«hether the committee should recognize, at
least informally, the present commission of l/6ij. 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 whether the committee
should establish a commission of perhaps 0.01 per
cent on transactions in certificates.
"Transactions in notes and bonds on an agency basis for the
System account with qualified dealers should be handled in such
a manner as to permit the dealers a spread of not more than 1/6U
of a point, and such transactions -where the dealers act as principal should be limited to exceptional cases and the transactions together with the reasons therefor should be reported separately by the New York Bank in the weekly report. Transactions
in certificates should be handled in such a manner as to permit
the dealers a spread of not more than 0,01 per cent (in relation
to the price to the customer when on an agency basis and in relation to the current market price when the dealers act as principal) on the longest maturity of certificates and the equivalent
in dollars on shorter maturities.
"3« V/hether the statements of condition of
qualified dealers should be required to include
certain additional information.
"The Hew York Bank should send to the members of the Federal
Open Market Committee information similar to that contained in
Mr. Rouse's letter of April 19, 19U6, with respect to the financial condition of the qualified dealers, at least once each year
or oftener if statements of condition are received from the dealers at more frequent intervals.
"li.. Whether the Reserve Bank Presidents should
be requested to furnish the executive committee any
information they may obtain regarding violations by
dealers of the terms upon -which the New York Bank
will transact'business with dealers in Government
securities.
"Each Federal Reserve Bank should report to the manager of
the account any information, which in its judgment is pertinent
and conies from reliable sources, in connection with the operations of any dealer that would be in violation of the established terms. For example, a report should be made of instances in
which dealers in violation of the established terms have influenced customers to sell when the System has been buying, have
made recommendations to customers that had the effect of disturbing the market, or have manipulated quotations in order to increase transactions."
Mr. Rouse reported that the New York Bank probably would receive
two or three applications for qualification from dealers in the near future.
One application was expected from Blair and Company which he stated now had
adequate capital, did a national business, and now had satisfactory management. He reported that this firm had been on the approved list at one time
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-15but had been removed for cause\ he felt, however, that the matters "which
had been subject to criticism previously were now corrected and that the
firm was entitled to restoration as a qualified dealer. He indicated
that if this application were received it would be sent with a full report to the committee for its approval. The two other applications expected were from Briggs, Schaedle and Company, and J. B. Roll and Company, and he thought that they would be satisfactory.
Executive Committee Meeting, October 3» 19 U6
Reference was made to llr. Rouse's statement to the executive
committee on June 10, 19U6, with respect to a possible application for
reinstatement as a qualified dealer from Blair and Company, Inc.
Under
date of July 30, 19U6, a letter was sent to Mr. liorrill by Mr. Rouse
stating that the application and a signed copy of the terms of agreement had been received from this firm, A report on the firm was enclosed with the letter, and it v/as recommended that reinstatement be
approved by the executive committee.
At this meeting, members of the committee reviewed the information contained in Mr. Rouse's report, and, after further discussion,
the committee unanimously voted to reinstate Blair and Company as a
qualified dealer, with the understanding that the New York Bank would
follow the firm's operations closely and report to the committee any
instance of violation of the terms of agreement.
Mr. Rouse further reported that D. W. Rich & Co., Inc., a
qualified dealer, arid Chas. E. Quincey Co., a qualified broker, had continued to carry what in the opinion of the New York Bank were unduly
large positions in Government securities despite frequent suggestions by
the Bank that these positions be reduced.
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Consideration of further action
-16to be taken led to the suggestion by the committee that the firms should
be advised that they would be disqualified for further transactions with
the System account. Kr. Rouse suggested that both firms first be put on
notice that unless corrective action were taken they would be disqualified, and Mr. Vest stated that under the terms of the Administrative
Procedure Act such notice should be given in writing and an opportunity
afforded the offenders to make necessary corrections before committee
action was taken• It was understood that this procedure would be followed.
Following this discussion, the committee unanimously voted that
in future situations of this kind, where it appeared that a broker or
dealer was acting in violation of the terms of agreement, the manager of
the System account would forward a statement of facts in the case to the
Secretary of the Federal Open Harket Committee and, in the absence of
advice to the contrary from the executive comr.iittee within a reasonable
time, the manager would notify the broker or dealer in writing that unless the necessary corrections were made within a stated time he vrould
be dropped from the list of qualified dealers.
Mr. Rouse then reviewed conversations with representatives of
Harriman, Ripley & Co., a qualified dealer, in August and September 19U6,
during which the question was discussed -whether the firm should continue
as a recognized dealer, llr. Rouse reported the firm's representatives
felt that they should not develop the Government securities end of their
business beyond its present level due to their preoccupation with corporate financing, the difficulty of obtaining necessary personnel, and
the absence of a senior partner who thoroughly understood the business.
In view of these circumstances, the representatives had informed l!ir. Rouse
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-17that the company felt it should -withdraw from its position as a qualified dealer.
The committee unanimously agreed that it was desirable for
this firm to -withdraw and that upon receipt of a written request from
the company the New York Bank should advise the firm that its position
as a qualified dealer had been discontinued.
Executive Committee Meeting, December 11, 191+6
Mr. Rouse referred to the understanding reached at the last
meeting of the executive committee that he would give notice in writing
to D. W. Rich & Co. and Chas. E. Quineey Co. that unless the extended
positions which they were carrying were' reduced they would be discontinued as qualified concerns for doing business with the open market
account. He reported that the letters had been- sent, that the final
response from D. W. Rich & Co. had not been received, but that a representative of Chas. E. Quineey Co. had stated that his firm would be glad
to cooperate and that the necessary correction would be made within 30
days.
Mr. Rouse also stated that, in accordance vdth the executive
committee's instructions of June 10, 19U6, he had been including in the
weekly report statements \dth respect to the large positions of the two
concerns referred to above. He noted that a report had been circulating
in the market that the Federal Reserve Bank of New York was "after" two
of the qualified dealers.
It was his suggestion that the committee's
instructions in this connection be changed to require that information
vdth respect to the position and borrowings of individual dealers be not
included in the weekly report but that such information be reported to
the members and secretary of the executive committee in a separate weekly
report.
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The committee unanimously approved this suggestion and amended
-18its instructions of June 10.
Mr. Rouse then reported that an application for qualification
had been received from the Manufacturers Trust Company of New York, but
that, after having reviewed the statement of terms and conditions, the
Trust Company had concluded that it did not wish to become a qualified
dealer at this time.
Executive Committee Meeting, February 21, 19U7
Mr. Rouse reported that, in the past, weekly meetings vdth a
committee representing the Government securities dealer group had been
scheduled but that regular meetings were no longer being held. An informal meeting had been held on February 21, 19V7* he said, at which he
had told the members of the committee that he did not see any further
need of frequent regular meetings, but that the Federal Open Market Com.mittee would continue to have, with the dealers, a common interest in the
market and in the effort to improve trading practices.
He reported that
it was then decided that meetings of the dealer group committee would be
held at least quarterly.
Interim Developments
In a letter to Chairman Eccles, dated April 21, 191+7, !&••
Rouse reported on developments in the case of D, W. Rich & Company, Inc.,
as follows:
H
As we have indicated from time to time in the supplements to the weekly reports of open market operations and
money market conditions, the positions and borrowings of the
individual dealers have been within reasonable limits except
in the case of D. W« Rich & Company, Inc., which discloses
that condition in its balance sheet of October 31, 19l|6« We,
of course, were cognizant of the situation prior to the receipt of the balance sheet and the matter was reported to and
acted upon by the Federal Open Market Committee at its meeting on October 3> 19U6. Subsequently, the Company was informed of the action of the Federal Open Market Committee in
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Federal Reserve Bank of St. Louis
-19a letter dated November 299 19 U6* •'which letter stated, in effect, that 30 days after the date thereof unless the Company's
position in United States Government securities was reduced to
an amount which, in the opinion of the Federal Reserve Bank of
New York, was not unduly large in relation to capital at the
risk of the business, the Company would no longer be included
among the qualified dealers with which the Reserve Bank is
authorized to transact business for the System open market
account. The net positions and borrowings of the Company as
of the date of our notice to it (November 29, 19U6), 30 days
from the date of such notice (December 28, 19U6), and as of
January 3, 19U7, were as follows:
11/29/U6
Certificates of Indebtedness
Restricted Bonds
Other Bonds £ Years and over
All Other Notes and Bonds
Total
Borrowings
$14*.5
16.1
12.6
8.2
$81.k
85.0
(000 omitted)
12/28/U6 1/3/U7
$lil-5>
7.9
8.?
1+.8
063.0
66,6
$1*2.9
.8*
15-3*
2*3
^59-7
60.U
^"(Evidencing correction on January 3> 19U7 of
error in former reports of 07*100,000, 2 1/)4S
of 19^6-59 as "restricted bonds").
In view of the action of the Company in reducing to reasonable
amounts its net position of bonds over five years in compliance
with our notice, the Company's classification as a qualified
dealer has been continued without interruption."
A memorandum, dated November 6, 19^7 * from Mr. Rouse for the
Federal Open Market Committee files and sent to members of the executive committee, reported the final disposition of the D. W. Rich &
Company case:
"I adviced the Securities Department on Monday that I
would speak to Mr. Rich and in the interim that we should
do no further business -with him. After seeing his figures
today, as of Monday night, I telephoned Mr. Rich, referring
to our conversation and my letter of about a year ago and
our conversation of last spring, and said that I had concluded that he had decided that our way was not his way,
and that, under these circumstances, I had instructed the
Securities Department not to do business with him. Mr. Rich
said in connection with the reduction of his holdings over
his statement date that he had taken a loss and then repurchased his securities. He indicated no intention of reducing this holding in the near future.
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Federal Reserve Bank of St. Louis
-20-
"Mr. Rich asked if despite this situation we would like
to see him occasionally and see his figures and I told him
that if he cared to do so v«re would be glad to have them and
any information with respect to the market that he thought
would add to our knowledge of the condition of the Government securities market.
"I discussed this matter this morning with Mr. George
Vest, General Counsel of the Federal Open Market Committee,
and -we felt that this should be treated as a continuation
of the situation as it developed on November 29, 19 U6, snd
that no formal communication to D. W. Rich & Company, Inc.
was necessary at this time."
Executive Committee Meeting, February 26, 191+8
Mr. Rouse notified the committee that, because the System had
been the principal market for Government securities in the recent past,
due to its support policy, some dealers not qualified to do business
with the System had complained that they were being forced out of business. He stated that these dealers were not a national factor in the
market and therefore could not be qualified to do business with the
System account. He reported that some of the dealers had suggested that
they be allowed to split commissions with recognized dealers as a partial
offset to the discrimination being exercised against them and that this
question had been given careful consideration by legal representatives
of the New York Bank and the Board.
The counsel had come up with no
solution to the problem and had raised the question of possible problems
which might arise under the Clayton Antitrust Act.
Mr. Rouse felt that the situation in his opinion was not serious, that he was much less concerned about the problem than he had been
>
because many issues of Government securities were moving above support
levels and therefore the nonrecognized dealers were again able to do
business competitively.
He felt that the situation had already righted
itself and that dealers not able to do business with the System were not
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Federal Reserve Bank of St. Louis
-21suffering serious loss of earnings.
Mr* House further reported that an application had been received
from the Northern Trust Company of Chicago to qualify as a dealer but their
business was not national in scope and therefore recognition was denied. A
similar application had been received from the Chemical Bank and Trust
Company of Hew York, and this application was being studied and would probably be acted upon favorably,*
Chairman Eccles suggested that the New York Bank submit a memorandum of the consideration which it had given to the nonrecognized dealer
problem, with a recommendation as to any action which might be taken. It
was his thought that, in the event of further complaint by any dealers, it
could be shown that the position of the committee had been taken only after
complete consideration of all the questions involved.
Mr. Rouse reported that sometime ago it had been ascertained that
there had been periods when the reserve position of dealer banks in Nei? York
was affecting their ability to act as Government security dealers, but that
in all other respects they had been discharging their dealer functions as
effectively and in some respects more effectively than the nonbank dealers.
To meet that situation, he had asked for written assurance from each of the
New York dealer banks that a stated amount of funds would be available at
all times for use in the bank's business as a dealer.
He added that such
assurances had been given and that it was proposed to get the same assurances from dealer banks in Chicago as soon as convenient.
On March 5>, 19i$, this application was approved by the officers of the
Federal Reserve Bank of New York.
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Federal Reserve Bank of St. Louis
-22Meeting of the Federal Open Market Committee, March 1, 19U8
At Chairman Ecoles' request, Mr. Rouse reviewed the discussion
in the executive committee concerning complaints of small dealers. Views
were expressed to the effect that a careful study of the situation should
be made, particularly vriLth respect to the position of the smaller dealers,
to determine whether the present rules should be modified to enable additional dealers to qualify to transact business directly with the System
account.
Mr. Sproul stated that the New York Federal Reserve Bank had
been asked to make a comprehensive report to the executive committee,
which would re-examine the matter and report to the full Committee.
Executive Committee Meeting, April 21, 19U8
Prior to this meeting a memorandum prepared at the Federal
Reserve Bank of New York under date of April 15, 19U8, on the subject
of dealer relationships, had been sent to members of the executive committee. A copy of this memorandum, together with correspondence related
to it, is attached to this report as Appendix C.
In response to a question from Chairman LIcCabe, Lr. Rouse stated
that three or four nonqualified dealers continued to request recognition
but they did not do a national business and, in some cases, did not have
the required capital to qualify as dealers for the System account.
Mr. Rouse further reported that none of the nonrecognized dealers had followed up a suggestion previously made in regard to splitting
commissions and that apparently that idea had been forgotten when the market moved above support levels.
By unanimous vote the executive committee concurred in the conclusion reached in the memorandum submitted by the New York Bank and
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Federal Reserve Bank of St. Louis
-23agreed to recommend to the full Committee that no change be made at that
time in the terms of agreement with dealers or in the interpretation of
those terms.*
Executive Committee Meeting, May 20, 19U8
lor. Rouse submitted a memorandum concerning the executive committee's instructions to the manager of the open market account regarding transactions with dealers on an agency vs. a principal basis. The
burden of the memorandum and ensuing discussion concerned the desire of
the open market account manager to limit dealers' profits on transactions
•with the System account to a maximum of 1/61} of a point on notes and bonds
and 0.01 per cent on long certificates and the dollar equivalent on shorter certificates.
T
'.hile this was easy enough when dealing on an agency
basis, it was somewhat more difficult on occasions when the System desired
to have the dealers act as principal. Transacting business with dealers
as principals was felt to be desirable in order to conceal the fact that
securities were being offered from the System account.
As a result, a motion amending the instructions to the New York
Bank was unanimously passed, as follows:
"Transactions in notes and bonds on an agency basis for
the System account with qualified dealers should be handled
in such a manner as to permit the dealers a spread of not
more than 1/6U of a point, and such transactions where the
dealers act as principal should be limited to exceptional
cases and the transactions together with the reasons therefor should be reported separately by the New York Bank in
the weekly report. If, however, it appears desirable in
the interest of maintaining an orderly market to avoid the
identification by the market of System operations, transactions in Treasury bonds may be confirmed to the Federal
On May 20, 19U8, the Federal Open Market Committee approved this recommendation.
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Federal Reserve Bank of St. Louis
-2UReserve Bank of New York by dealers as principals rather than
as agents, provided the dealers' confirmations to the Bank
state that the bonds were bought from or sold to another at a
price spread of not more than 1/6U of a point. Transactions
in certificates should be handled in such a manner as to permit the dealers a spread of not more than 0.01 per cent (in
relation to the price to the customer when on an agency basis
and in relation to the current market price when the dealers
act as principal) on the longest maturity of certificates and
the equivalent in dollars on shorter maturities*11
Executive Committee Meeting, November 30* 19UP
Mr. Rouse reviewed in detail some information which had come to
him regarding a proposed reorganization of Blair & Co., Inc., one of the
dealers recognized to do business with the System account.
Because de-
velopments in this reorganization raised questions as to the future management of the Company and the capital that would be available for its Government security business, he had informed the management of the Company that
until these and other questions were cleared up the System would transact
no further business with the Company.
The executive committee expressed
concurrence in the action that LIr. Rouse had taken.
Meeting of the Federal Open Market Committee, February 28, 19h9
Mr. Rouse referred to the terms upon which the System account
would transact business with brokers and dealers in Government securities
and reviewed briefly the complaints made by certain nonrecognized dealers
during the previous year. He also reviewed the consideration given to these
complaints by the Federal Open Market Committee and the reasons for the conclusion reached the previous year that no change should be made in the statement of terms, lie added that there was nothing in the present situation that
would ?/arrant a 'change in the terms.
Executive Committee Meeting, November 18, 19h9
Lir. Rouse reported that, with tv\ro or three exceptions, all of the
recognized dealers were living up to the terms of the agreements under which
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Federal Reserve Bank of St. Louis
they were qualified.
These exceptions involved the fact that these deal-
ers were not doing a sufficient volume of their business in Treasury bonds
and, as a result, their business was not sufficiently wide in scope to discharge their responsibility for making a national market in these securities under all conditions. He reported that he had urged them to broaden
their activities and if there was no objection from the committee he would
require that this be done. He further suggested that if satisfactory results were not obtained promptly he would bring the matter to the attention of the executive committee again. No disagreement was expressed by
the committee members to this procedure.
Meeting of the Federal Open Market Committee, March 1, 19^0
Mr. Rouse reviewed the terms of agreement under which dealers
were qualified to do business with the System account, reported that there
had been no complaints from nonrecognized dealers, and suggested that no
changes be made in the terms of agreement or in the interpretation thereof.
Meeting of the Federal Open Market Committee, March 8, 195>1
With respect to the published terms on which the Federal Reserve
Bank of New York transacts business with qualified dealers in United States
Government securities for the System open market account, Mr. Sproul stated
that from time to time nonqualified dealers had questioned the arrangement;
that these questions arose only during periods when the System was actively
supporting the market and was the principal purchaser of a particular issue
or issues of securities, that this problem should tend to disappear with
the freer market now anticipated; and that since the existing terms had
worked well in the past he felt it would be desirable to continue them.
Chairman McCabe suggested the desirability of having a formal
report submitted to the Federal Open Market Committee on this matter
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Federal Reserve Bank of St. Louis
-26inasnuch as the most recent study submitted had been made in 19U8, and
Mr. Sproul responded that he felt it would be appropriate to ask the
Federal Reserve Bank of New York to make such a report to the executive
committee at an early meeting of that committee.
Upon motion duly made and seconded, and by unanimous vote, it
was agreed that no change in the statement of terms would be made at this
time, with 'the understanding that the Federal Reserve Bank of New York
would submit a report with respect to the arrangement for consideration at
an early meeting of the executive committee.
Executive Committee Meeting, April 5, 195>1
Mr. Szymczak referred to an amended motion which he prepared for
consideration by the executive committee, copies of which had been sent to
each member of the committee on April 2, 19;>lj in which he recommended
that the whole subject of qualified and unqualified dealers in Government
securities be studied by a committee of three members of the executive
committee. He stated that he contemplated that such a study would differ
from the report which the full Committee, at its meeting on March 8, requested that the executive committee arrange for, and that perhaps the
study he suggested should come as a result of a request by the full Committee.
He went on to suggest that, since the matter was not urgent, it
be referred to LIr. Llartin -with the understanding that he would look into
it and, if he felt it desirable to do so, he might ask some of the members
of the executive committee to make an informal study with a view to determining what if any recommendation should be made to the full Committee.
No objection to this procedure was indicated.
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Federal Reserve Bank of St. Louis
-27Meeting of the Federal Open Market Committee, May 17, 19£l
Chairman liartin sugpested that the Committee authorize him to
appoint a committee to consist of himself as chairman and not less than
two or more than four other members of the Federal Open Market Committee
to make a study of the scope and adequacy of the Government securities
market during the coming months with the understanding that the committee
Y/ould be authorized to call on outside assistance if that should be considered to be necessary and that it would report to the executive committee
and to the full Committee. Chairman Martin emphasized that his suggestion
for a study of this type was in no sense a criticism of the operations of
the System account.
In response to questions, he indicated that there was
a need for a broader market for Government securities, that perhaps there
would be value in studying the British Government securities market, that
the time may come when the Federal Open Market Committee might find it
necessary to change the procedure whereby it did business with only a small
number of qualified dealers, and that he hoped the study proposed would
make some worth-while suggestions along these and other lines.
Several other members of the Committee expressed the View that
it would be desirable to have a study such as that proposed by Chairman
Martin.
Chairman Martin vvras then authorized by unanimous vote to appoint
a committee to 2:iake a study of the Government securities market along the
lines he suggested.
Meeting of the Federal Open Market Committee, March 1, 1952
Chairman Liartin referred to the published terms on which the
Federal Reserve Bank of New York transacts business with qualified dealers
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Federal Reserve Bank of St. Louis
-28in United States Government securities for the System open market account,
stating that he had no suggestions for a change in the terms at this time.
Upon motion, it was unanimously agreed that no change in the
statement of terms should be made at this time.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL
(For use of the ad hoc Subcommittee on
Study of the Government Securities
Market, Federal Open Market Committee)
FEDEML OPEN MARKET COMMITTEE RELATIONSHIP WITH
BROKERS AND DEALERS IN GOVERNMENT SECURITIES
Appendix A
Correspondence making effective the formalization of terms under
which the Federal Reserve Bank of New York would transact business for the
open market account with brokers and dealers in Government securities:
(1) Letter, May 6, 19UU* from Secretary Morrill to all Federal
Reserve Bank Presidents enclosing a copy of the statement
of terms.
(2) Letter, Hay 6, 19hh) from Secretary llorrill to Mr. Sproul
containing instructions from the executive committee of
the Federal Open Market Committee relative to putting the
adopted procedure in effect.
(3) Letter, kay 31, 19hh, from llr. Sproul to Mr. Eccles con-
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Federal Reserve Bank of St. Louis
cerning action taken by the New York Federal Reserve Bank
in compliance with the executive committee's directive.
Attached is a list of comments on each broker and dealer
qualified.
Appendix A
COPY
Dear Sir:
You rail recall that at the meeting of the Federal Open
Market Committee on February 29, 19hh> the Committee approved in
substance a statement of proposed terms upon "which the Federal Reserve Bank of Hew York vrould transact business with brokers and
dealers in United States Government securities for the System open
market account. This action was taken with the understanding (1)
that the executive committee was authorized to make such changes
in the form of the statement of terms as appeared to be desirable,
(2) that the procedure would be put into effect at such time as in
the judgment of the executive committee such action appeared to be
desirable after having informed the Treasury of the proposed arrangement, and (3) that the executive committee was authorized to
issue such instructions to the Federal Reserve Bank of New York as
agent for the System account in connection with the proposed proce
dure as appeared to the executive committee to be desirable, including the manner in "which advice of the arrangement was to be
sent to dealers who might qualify thereunder,
A copy of the statement of terms is enclosed in the
form approved by the executive committee. A copy of the letter
containing the instructions of the executive committee to the
Federal Reserve Bank of New York in connection with the statement
is also attached,
"Qien the statement has been presented to the brokers
and dealers with whom the Federal Reserve Bank of New York now does
business for the System account, it will be handed by the Bank informally to representatives of the press as a formalization of existing procedure.
If any broker or dealer in your district evidences an
interest in qualifying under the terms of the statement as a broker
or dealer with whom the Federal Reserve Bank of New York would do
business for the System account, and in your opinion such broker or
dealer would have a reasonable chance of qualifying, it is requested
that you furnish him a copy of the statement, and, in the event he
desires to pursue the matter further, that you so inform the manager
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Federal Reserve Bank of St. Louis
COPY
—2—
of the System account, giving him such information with respect
to the broker or dealer as you think would be of value in determining whether he should be qualified. It is assumed that if a
broker or dealer in your district should take up the matter of
qualifying directly with the New York Bank, the Bank would request your views before reaching a decision.
Very truly yours,
Chester Horrill,
Secretary.
Enclosures 2.
TO THE PRESIDENTS OF ALL THE FEDERAL RESERVE BANKS EXCEPT NEW YORK.
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Federal Reserve Bank of St. Louis
Appendix A
COPY
TERMS ON WOK FEDERAL RESERVE BANK OF NEW YORK WILL
TRANSACT BUSINESS WITH BROKERS AND DEALERS IN UNITED STATES
GOVERNMENT SECURITIES FOR THE SYSTEM OPEN MARKET ACCOUNT
The Federal Open Market Committee has directed the Federal
Reserve Bank of New York (hereinafter referred to as the Bank) to
transact business in United States Government securities for the System
open market account with reputable brokers and dealers in such securities who meet the qualifications and agree in writing to comply with
the terms and conditions set forth below.
1. In determining "whether a person (individual, partnership or corporation, including a bank) is a qualified broker
or dealer with whom the Bank will transact business, and the
extent to which business will be transacted with such person,
the following factors will be taken into consideration:
(a) Integrity, knowledge, and capacity and experience
of management3
(b) Observance of high standards of commercial honor
and just and equitable principles of trade;
(c) Willingness (in the case of a dealer) to make markets under all ordinary conditions;
(d) The volume and scope of business and the contacts
such business provides;
(e) Financial condition and capital at risk of business; and
(f) The reliance that can be placed on such person to
cooperate with the Bank and the Federal Open Market
Committee in maintaining an orderly market for
Government securities; to refrain from making any
recommendations or statements or engaging in any
activity which would encourage or stimulate undue
activity in the market for Government securities;
and to refrain from disclosing any confidential information which he obtains from the Bank or through
his transactions with the Bank.
2. The Bank will obtain from such person an agreement in writing to comply with the follovdng terms and conditions:
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
COPY
-2-
(a) He "will furnish the Bank with a statement for the
confidential information of the Bank and the Open
Liarket Committee showing as of the close of business each business day:
(1) The total amount of money borrowed (directly
and indirectly);
(2) The par value of all Government securities
borrowed;
(3) His position, both long and short, in Government securities, classified by classes of securities and maturity groups (or by issues, if
so requested by the Bank);
(Ij.) The volume of transactions during the day in
Government securities, classified by classes
of securities and maturity groups (or by issues,
if so requested by the Bank); and
(5>) Such other statistical data as in the opinion of
the Bank will aid in the execution of transactions for the System open market account.
(b) At or before the completion of each transaction with
the Bank, he will furnish the Bank with a written
notification disclosing whether he is acting as a
broker for the Bank, as a dealer for his ovm account,
as a broker for some other person, or as a broker for
both the Bank and some other person. In the absence
of a special agreement to the contrary with the Bank
with respect to a particular transaction, he will not
act as broker for any other person in connection v/ith
any transaction with the Bank, and he will receive no
compensation or profit of any kind in connection with
the transaction other than the specified commission
paid him by the Bank.
(c) In the absence of special arrangements with the Bank,
delivery of securities will be made at the office of
the Bank before 2:15> p.m. on the next full business
day following the day of the contract and all payments
by the broker or dealer will be in immediately available funds.
(d) He will furnish the Bank not less frequently than once
during each calendar year with a report of his financial
condition as of a date not more than l£> days prior to
COPY
-3—
the delivery of the report to the Bank in form acceptable to the Bank and prepared or certified by
a public accountant acceptable to the Bank; and,
upon the request of the Bank, he will furnish it
with a statement of condition as shown by his books
as of a date specified by the Bank.
(e) Unless the Bank shall have informed him of its desire to purchase or sell a particular issue of
Government securities, he will not solicit from any other
person offerings of or bids for any issue of Government securities for the purpose of placing himself
in a position to offer to sell to or buy from the
Bank securities of such issue.
The Federal Open Market Committee has further directed that
the Bank decline to transact any further business with a broker or dealer in any case in which the Bank has concluded that the broker or dealer
no longer meets the qualifications set forth above or has willfully violated or failed to perform any of the terms and conditions set forth in
the agreement.
To the Federal Reserve Bank of New York:
The undersigned hereby agrees to meet the qualifications and to
comply mth the terms and conditions set forth above.
Dated:
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Federal Reserve Bank of St. Louis
___^
(Signature)
Appendix A
COPY
May 6, I9hh
Mr. Allan Sproul, President,
Federal Reserve Bank of New York,
New York 7} New York.
Dear Mr. Sproul:
At its meeting on February 29, 19kk, the Federal Open Market Committee approved in substance a statement of proposed terms
upon which the Federal Reserve Bank of New York ?\rould transact business with brokers and dealers in United States Government securities
for the System open market account. This action was taken with the
understanding (1) that the executive committee was authorized to make
such changes in the form of the statement of terms as appeared to be
desirable, (2) that the procedure would be put into effect at such
time as in the judgment of the executive committee such action appeared to be desirable after having informed the Treasury of the proposed
arrangement, and (3) that the executive committee was authorized to
issue such instructions to the Federal Reserve Bank of New York as
agent for the System account in connection with the proposed procedure as appeared to the executive committee to be desirable, including the manner in which advice of the arrangement was to be sent to
dealers who might qualify thereunder.
A copy of the statement of terms as prepared in consultation
idth you and Mr* Rouse and as approved by the members of the executive
committee is enclosed, and there are set forth below the instructions
issued to the New York Bank in connection with the statement pursuant
to the authority granted by the full Committee on February 29, "^-9hh'
1, The Federal Reserve Bank of New York shall furnish
copies of the statement of terms to each broker or dealer in
Government securities with whom the Bank has been transacting business on behalf of the System open market account, and
to such other brokers and dealers as evidence to the Bank an
interest in qualifying and in the opinion of the Bank would
have a reasonable chance of qualifying. On and after May 15>,
I9hh) the New York Bank will transact business on behalf of
the System open market account only with the brokers and dealers who meet the qualifications, have executed the agreement,
and comply with the terms set forth in the statement.
2. When the statement has been presented to the brokers
and dealers with whom transactions are now conducted for the
System open market account, the Bank shall give copies to
representatives of the press informally as a formalization of
existing procedure.
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Federal Reserve Bank of St. Louis
COPY
Mr. Allan Sproul
-2-
3o The Bank shall keep the executive committee of the
Federal Open Market Committee informed of each broker and
dealer -with whom it ordinarily transacts business and of
each addition to, or removal from, the list of qualified
brokers and dealers.
1|. The Bank shall encourage the observance of high
standards of commercial honor and just and equitable principles of trade by the brokers and dealers in Government
securities, through the medium of the Bank's contacts with
the brokers and dealers and the Government Security Dealer
Group or any other similar organization that may exist or
develop.
5. TVhen any broker or dealer has been removed from
the list of qualified brokers and dealers for failure to
meet the qualifications set forth in the statement of
terms or for willful violation of or failure to perform
any of the terms and conditions set forth in the agreement, and the Bank is satisfied that he has taken appropriate steps to correct any default and to prevent the
occurrence of similar defaults in the future, the Bank may
restore him to the list of qualified brokers and dealers
and resume the transaction of business with him, after obtaining the consent of the executive committee of the
Federal Open Uarket Committee.
A copy of the letter being sent today to the Presidents of
the other Federal Reserve Banks in connection with this matter is also
enclosed.
Very truly yours,
Chester Morrill,
Secretary.
Enclosures 2
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Federal Reserve Bank of St. Louis
Appendix A
COPY
FEDERAL RESERVE BANK
OF NKV YORK .
May 31, 19iiU«
Dear Mr. Eccles:
Referring to Secretary Merrill's letter of Hay 6, transmitting to this bank the instructions of the executive committee of the
Federal Open Market Committee concerning the formalization of the terms
on which this bank transacts business with brokers and dealers for
System Open Market Account, I wish to advise you that:
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Federal Reserve Bank of St. Louis
(1) This bank has furnished each broker and dealer
in United States Government securities, with whom
this bank has been transacting business, a copy of
the statement of terms on which this bank will transact business with brokers and dealers in United States
Government securities for the System Open Market Account. At the opening of business on May 15, 19lilij
executed agreements and oral acceptances of the statement of terms had been received from the principal
dealers so that beginning on that day there was no
question of this bank's ability to function under the
instructions issued to it by the executive committee
of the Federal Open Market Committee. Since that
time executed agreements have been received from all
of the dealers and brokers who in our opinion meet
the qualifications set forth. The bank-dealers generally signed the statement on the understanding that
requirement 2(d) was not applicable to member banks,
and two of the brokers whose business in United States
Government securities is primarily as brokers on the
New York Stock Exchange signed on the understanding
that the requirements listed in 2(a) 1 to U were not
applicable in their case. In addition, one of the
dealer-banks, acting under advice of its counsel,
substituted the words "buy and sell" for "make markets" in paragraph 1( c) owing to a feeling that the
term "make markets" has the connotation of pegging
the market, and deleted the words "both long and
short" in paragraph 2(a) (3) inasmuch as a bank legally could not go short. All these exceptions appear
reasonable to us. The dealers, without exception, accepted the terms as being a fair presentation of their
oral understanding with this bank, although a number
expressed the view that the formalization of this understanding was unnecessary.
C 0PY
Federal Reserve Bank of Hew York
-2- Honorable Karriner S. Eccles 5/31/UU
(2) On May lo, 1 met with representatives of the press and
made the statement of terms available for their reading and
inspection, and discussed with them the reasons for their
formalization. So far the press has handled the matter well.
(3) There is enclosed data descriptive of each qualified
broker and dealer with whom this bank is prepared to transact
business on behalf of the System Open Larket Account. These
contain a summarization of the information on v/hich this bank
based its qualification of such dealers and brokers. The
list of dealers and brokers covered is as follows:
(a) For over-the-counter business
Govt. Bond Dept. - Bankers Trust Company - New York City
C. F. Childs and Company - Chicago, 111.
Govt. Bond Dept. - Continental Illinois National Bank and
Trust Company of Chicago - Chicago, 111.
C. J. Devine and Company - New York City
Discount Corporation of New York New York City
The First Boston Corporation New York City
Govt. Bond Dept. - The First National Bank of Chicago Chicago, 111.
Govt. Bond Dept. - Guaranty Trust Company of New York New York City
Harriman Ripley & Co., Incorporated New York City
D. \7. Rich & Company, Incorporated New York City
Salomon Brothers & Hutzler New York City
(b) Brokers on New York Stock Exchange
Asiel & Co. - New York City
Mabon & Co. - New York ^ity
Chas. E. Quincey & Co. New York City
Salomon Brothers and Hutzler - New York City
There are five other dealers with whom this bank has done business, occasionally
and in limited volume, who do not clearly qualify because of the relatively
small volume and restricted scope of their business and the limited amount of
capital at the risk of their business. They have been advised that they do not
qualify, although there may be situations in the future when, with the knowledge
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Federal Reserve Bank of St. Louis
COPY
Federal Reserve Bank of New York
-3- Honorable Marriner S. Eccles 5/31/iiU
of the executive committee, we shall find it to the advantage of the System
Open Market Account to deal v/ith them. These dealers are:
Briggs, Schaedle and Company, Inc.
Harvey Fisk and Sons, Inc.
R. W. Pressprich and Company
Chas. E. Quincey and Company
J. B. Roll and Company, Inc.
The firm of Charles E. Quincey and Company, however, does qualify for the
transaction of business as a broker on the New York Stock Exchange and has
executed the required agreement as indicated above. The only other dealer in
United States Government securities with whom this bank had occasionally done
business is Blair and Company, Inc. (Blair Securities Corporation). However,
there have been no transactions since December 19^3 with this concern, other
than the purchase of Treasury bills at the 3/8 per cent rate, as in the opinion of the officers of this bank, its portfolio consistently has been too
large in relation to its capital, and it failed to report promptly a large
contingent liability that appeared in its annual statement.
It was considered undesirable to include even dealers with whom,
some business has been transacted at times in the past, if they do not clearly
qualify under the written terms and conditions now effective. The line of demarcation must be as clearly defined as possible, if our practice is to be
understood and defensible, and if future requests for qualification are to be
capable of determination.
Vv'e believe it is important that the names of the qualified dealers
and brokers be held in strict confidence, in order that our action may not
adversely affect the business or reflect in any way upon the integrity, knowledge, and capacity and experience of management of the firms that do not
qualify.
Yours sincerely,
Allan Sproul,
President.
Honorable Liarriner S. Eccles,
Chairman, Executive Committee,
Federal Open Market Committee,
Washington 25, D. C.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
DISCOUNT CORPORATION OF NET YORK
Incorporated under New York laws in 1918. An investment company operating under Article XII of the New York Banking Law.
NATURE OF BUSINESS
Dealers in Bankers1 acceptances and U. S. Government securities.
OFFIGEES
Dudley H. Mills, Chairman of the Board - Herbert N. Repp,
President - Edward E. Anderson, Vice President - Charles VJ". Belmer,
Vice President - Robert M. Coon, Vice President and Treasurer Francis D. Bartow, Jr., Secretary - Walden H. Leverich, Donald D.
Leeds and Wingate Bixby, Assistant Vice Presidents - Charles E. Dunbar,*
Charles F. Lang, Albert R. Fegan and William Ewing, Assistant Treasurers.
MAIN OFFICE
58 Pine Street, New York, N. Y,
BRANCHES
None
NET WORTH
05,722,000 - (12/31/U3), not including $1,263,000 reserve for
premiums, discount, taxes and contingencies.
CREDIT REPORT
Because its interests are identified -with the leading New York
GLty banks, no investigation with its banks of account has been made.
SCOPE OF BUSINESS AMD CONTACTS
Does business on both a dealer and order basis and the greater
part of it comes from large corporations, from commercial banks in the
larger cities, and from savings banks in the New York area. Due to its
close contact with most of the large commercial banks and corporations,
the firm is especially active in short term securities. It also has a
large volume of business vdth security houses, particularly those located
in New York City.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
C O P Y
THE FIRST BOSTON CORPORATION
Chartered under Massachusetts laws in 1932. The Company's name
was originally First of Boston Corporation and the stock was controlled by
the First National Bank of Boston -under a beneficiary trust agreement.
Under the Federal Banking Act of 1933 it became necessary to separate the
business entirely froir. that of the bank. Since 193U the capital stock has
been privately owned, although many of the stockholders and depositors of
the First National Bank of Boston are shareholders in this corporation.
NATURE OF BUSINESS
Underwriters and distributors, dealers in U. S. Government securities, bankers 1 acceptances, State, Municipal, Canadian, public utility, industrial and railroad issues and bank, insurance and other investment stocks.
OFFICERS
John R. Macomber, Chairman of Board- Allan H. Pope, President H. 1.1. Addinsell, Chairman of Executive Committee - J. C. Montgomery, VicePresident and Treasurer - Francis A. Cannon, James Coggeshall, Jr., Eugene
I. Cowell, Nevil Ford, Col. R. Parket Kulin, Edward H. Ladd, 3rd, Aubrey G,
Lanston**, Duncan R. Linsley, Philip Lockvvood, James A. Lyles, L. Meredith
Maxson, Louis G. Idudge, Theodore S. Mead, William II. Potter, Jr., Frank M.
Stanton, VJinthrop E. Sullivan, Adolphe H. Wenzell, Herbert T. C, Wilson,
George D. Woods, Vice Presidents - Alfred A. Gerade, Vice President aid
Comptroller - Arthur B. Kenney, Honorary Secretary - Allen E» Burns, Secretary and Assistant Treasurer*
""Trading Department - Government Securities.
EXECUTIVE OFFICES
100 Broadway, New York, N. Y. and One Federal Street, Boston, Mass.
BRANCIffiS
Buffalo; Chicago; Cleveland; Hartford; Philadelphia, Providence;
Rutland, Vt.; San Francisco; Springfield, Mass.
REPRESENTATIVES
Albany, New York.
NET TIORTH
Oil, 9115,000 - (12/31/1+3)
CREDIT REPORT
The last investigation with the banks of account was made in
May 19li3> at which time it was learned that ample facilities were available
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
-2-
COPY
THE FIRST BOSTON CORPORATION
to the corporation on both a secured and unsecured basis•
sions of high regard for the management were received.
The usual expres-
SCOPE OF BUSINESS AND CONTACTS
Transacts business on both a dealer and order basis and its
numerous branches and representatives provide the firm with an active contact vdth investors in all sections of the country, although its business
in the South Atlantic, East South Central and West South Central states is
not believed to be large. All types of investors, both small and large, are
included among its customers. It also does a substantial business with
other security houses.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
C O P Y
D. W, RICH & COMPANY, INCORPORATED
Incorporated under New York laws in October 19UO. It was formed
for the purpose of acquiring the domestic government securities and bankers
acceptance departments of the New York Hanseatic Corporation.
NATURE OF BUSINESS
Dealers in U. S. Government Obligations and Bankers Acceptances.
OFFIQERS
Dominic W. Rich, President - D. William O'Kolski, Vice President
and Secretary - Edward J. O'Connell and Harold M. Leinbach, Vice Presidents Henry Scherping, Treasurer - Marshall H. Montgomery, Director - Reginald
Luhr, Assistant Vice President.
MAIN OFFICE
31 llassau Street, New York, N. Y.
BRANCHES
None
NET WORTH
0633,000 - (V30/U)
CREDIT REPORT
A completed investigation in May 19Ub with the banks of account,
indicates that the company enjoys a good reputation. Ample credit is available to it and in the bankers' opinion the management is capable and deserving of confidence.
SCOPE OF BUSINESS AND CONTACTS
Its business is principally with commercial banks in the larger
cities of the United States, particularly those in the Mid-Atlantic and
East North Central states. It also does a moderate volume of business in
short-term securities with a few large corporations. Its business, except
in short-term securities, is largely on an order basis.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
C O P Y
BANKERS TRUST COMPANY - NEW YORK CITY
Dealers in U. S. Government, State and Municipal Securities.
BOND DEPARTMENT
B. A. Tompkins, E. F. Dunstan and Robert C. Morris*, Vice Presidents - W. Laud-Brown, Arthur S. Schlicting*, and George F. Trefeer,
Assistant Vice Presidents - H. F. Dobbins and F« R. Began*, Assistant
Treasurers.
^U. 3. Government Trading Division
SCOPE OF BUSINESS AND CONTACTS
A large part of its business is with commercial banks, many of
which use the Bankers Trust Company as their New York correspondent. It
appears to be particularly active with banks in the Mid-Atlantic and
South Atlantic states. It also has a moderate amount of business with
other types of investors, but many of these may be depositors of the
Bankers Trust Company* It transacts business on both an order and dealer
basis.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
C.Q P ?
C. F. GHILDS & COMPANY
A Delaware corporation chartered in 1930. A Maine corporation
of this name, handling mostly municipal and Government securities, had
been chartered by Mr. C. F. Childs in 1911. In 1928, Mr. Childs sold
his interests therein to Goldman Sachs interests, but repurchased his name
and re-entered this business in 1930.
NATURE OF BUSINESS
Dealers in U. S. Government Securities, Instrumentalities, Territorial and Municipal Obligations.
OFFICERS
C. Frederick Childs, President - E. N. Childs, Vice President F. N. Childs, Vice President and Assistant Treasurer -A. G. Pickard,
llalon S. Andrus and C. C. Scholefield, Vice Presidents - M. A. Partridge,
Secretary and Treasurer - Russel T, Williams, William M. Fletcher, Byron
R. Mitchell, Davis Kales, William H. Gray and Murray F. Brown, Assistant
Vice Presidents - C. R. Ekman, J. D. McNally, Charles Giamondi, Luke
Nebhan, J. D. Robinson, C. ¥. Steinman, Herman Golin & Thomas Keys, Assistant Treasurers - Dorothy McVeigh, Assistant Secretary.
MAIN OFFICE
llj.1 W. Jackson Blvd., Chicago, 111.
BRANCHES
Boston; Cleveland; New York; Pittsburgh; St. Louis.
NET WORTH
8U,730,000 - (12/31/U3)
CREDIT REPORT
When last investigated in April 19ii3> ample facilities were
available on both day loan and secured basis and we received favorable
expressions concerning the responsibility of the house and the ability
of the management.
SCOPE OF BUSINESS AND CONTACTS
Carries on an active dealer and order business in all sections of
the country with the possible exception of the South Atlantic states. Its
branch offices are very active and the percentage of its business coming
through its branches is probably the largest for any dealer in U. S. Government securities. On the other hand, its volume of busin.ess with investors
in the New York area is probably the smallest of any of the large private
dealers in U. S. Government securities. Most of its customers may be termed
"small to medium" sized investors. A moderate volume of business also flows
to the firm from other security houses*
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY
OF CHICAGO
Dealers in U. S. Government and Municipal Issues.
U. S. GOVERNMENT SECURITIES DEPARTMENT
F. LI. Knight and Robert S. Drew, Vice Presidents Merle G. Glanville, Second Vice President - Magnus I. Ronning
and Orion Morris, Assistant Cashiers.
SCOPE OF BUSINESS AND CONTACTS
Its business is largely on an order basis with customers of the bank and with commercial banks in the East North
Central and West North Central states with which it maintains
an active contact.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
HARRIMAN RIPLEY & CO., INCORPORATED
Incorporated in 193U "under New York laws as Brown, Harriman
and Company. The present corporate name was adopted on January 1, 1939*
The company was formed to take over the securities business of Brown Bros.
Harriman and Company, v/hich, in order to conform with the requirements of
the Banking Act of 1933, was required to separate its investment banking
from its deposit banking business. Some of the officers of the subject
company were formerly partners of Brown Bros. Harriman and Company or
executives of the National City Company of New York, Inc., security affiliate of the National City Bank of New York, which was liquidated in 193Jj- in
order to conform with the requirements of the Banking Act of 1933*
NATURE OF BUSINESS
Underwriters and Distributors, Dealers in U. S. Government,
State and Municipal Bonds, in Canadian Government, Provincial and Municipal Bonds, and in Public Utility, Railroad, Industrial and other investment securities.
OFFICERS
Joseph P. Ripley, Chairman - Pierpont V. Davis, President Harry W. Beebe, Milton C. Cross, R. McLean Steward, Elvrood D. Smith,
Frederick A. Erayer, George E. Abbot, Nathan D. McClure, Frederick M»
Thayer, Harding C. Woodall, Walter V. Millette, David L. Skinner and
Franklin T. McClintock, Vice Presidents - Willet C. Roper, Secretary and
Treasurer - Reginald 1/lartine, Comptroller and Assistant Secretary William R. Eppel, Assistant Secretary and Assistant Treasurer.
U. S. Government Bond Department - James S. Baker, Manager.
MAIN OFFICE
63 Wall Street, New York, N. Y.
PRINCIPAL OFFICES
New York; Boston; Philadelphia; Chicago.
REPRESENTATIVES
Albany; Cleveland; Detroit; Indianapolis; Reading, Pa.
NET WORTH
$7,1412,000 - (12/31/143)
CREDIT REPORT
Our last investigation was conducted in April 19k3 when the
company was readily obtaining its requirements on both day loan and
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
-2-
C O P Y
HARRIMAN RIPLEY & CO., INCORPORATED (Cont'd)
collateral basis. Favorable opinions regarding the standing of the house
and the ability and integrity of the management ?rere expressed in all
quarters.
SCOPE OF BUSINESS AND CONTACTS
Does a substantial business in corporate and municipal securities, but its Government security business is small and believed to be a
"sideline" in order to accommodate its corporate and banking customers.
Most of its business is on an order basis and in short term securities.
Their capital, contacts, out-of-town offices and representatives provide
basis for substantial growth. The manager of the Government Bond Department is the current chairman of the Government Security Dealer Group.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
THE FIRST NATIONAL RANK OF CHICAGO
Dealers in U. S. Government and Municipal Bonds.
BOMD DEPARTI.IENT
Irvin L. Porter, Austin Jenner, James P. Feeley,
J. H. C. Templeton, and John H. Grier, Vice Presidents'* Lewis Miller, Assistant Vice President.
*~U. S. Government Bond Dept.
SCOPE OF BUSINESS AND CONTACTS
Its business is on both a dealer and an order basis
with customers of the bank and with commercial banks in the
East North Central, 'Test North Central and South Central states
with which it maintains an active contact, although it extends
its business on a less active basis to both coasts.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
GUARANTY TRUST COMPANY OF NEW YORK
Dealers in U. S. Government and Municipal Bonds and
Home Owners Loan,, Federal Farm Mortgage, R. F. C., C. C. C.,
Federal Intermediate Credit, Federal Home Loan and Federal
Land Bank Securities and U. S. Housing Authority Notes.
U. S. GOVERNMENT BOND DEPARTI.ffNT
Arthur A. Kiendl, Second Vice President, John D. C.
Towne, Jr., William W. Pevear and J. V. Hendricks, Assistant
Treasurers.
SCOPE OF BUSINESS AND CONTACTS
Its business appears to be largely with investors who,
in one way or another, deal with the Guaranty Trust Company.
The greater part of its volume of business arises in transactions in short term securities, reflecting, in part, the activity
of the Guaranty Trust Company and many of its corporate accounts.
Business is transacted both on a dealer and order basis.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
G 0PY
G. J. DEVINE & CO. - (PARTNERSHIP)
The trade style "C. J. Devine & Co." Y/as registered December 27,
19^0 by the partners. The firm was formed to purchase the assets and
assume the liabilities of C. J. Devine and Co., Incorporated, a New York
Corporation organized June 1, 1933NATURE OF BUSINESS
Dealers in U. S. Government, Territorial, Federal Land Bank and
Municipal securities.
PARTNERS
Christopher J. Devine, David J. Garvin, Vincent H. Herrmann,
Frank T. Kennedy, Ilatthew F. Reilly, William J. Stoutenburgh.
MAIN OFFICE
i±8 Wall Street, New York, N. Y.
BRANCHES
Chicago; Boston; Philadelphia; Pittsburgh; Cleveland;
Cincinnati; St. Louis; San Francisco.
NET WORTH
05,221,000 - (12/31/143)
CREDIT REPORT
An investigation with its banks of account was completed
April 12, 1914; and the information obtained was of a highly complimentary
nature.
SCOPE OF BUSINESS AND CONTACTS
Transacts business with investors, both small and large, in all
parts of the country, on both an order and dealer basis, and its volume
of business has consistently been the largest of any reporting dealer in
U. S. Government securities. Its extensive wire service and numerous
branches are a means for active contact with investors* The firm also
does a substantial business with security houses in all parts of the
country.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
C O P Y
CHAS. E. QUINCEY & CO. - (PARTNERSHIP)
Chas» E. Quincey & Co. is a trade name registered by the partners February 3> 19i|l»
The firm was formed in January 188?, by the late Charles E,
Quincey "who died in 192ii«
NATURE OF BUSINESS
Dealers in U. S. Government Obligations, Home Owners Loan
Corporation, Federal Farm Mortgage, Federal Land Bank, Federal Home Loan
Bank, Federal Intermediate Credit Corporation, and U, S. Territorial
Issues, Brokers in Railroad, Public Utility, Industrial and Foreign
Government issues. Member of the New York Stock Exchange.
PARTNERS
Maurice A. Gilmartin, James Edmund Orr, Maurice A. Gilmartin, Jr.,
John A. Cashman, Robert A. Love, and Edmund J. Leonard.
MAIN OFFICE
2$ Broad Street, New York, N. Y.
BRANCHES
None
NET WORTH
$U37,000 - (6/30/U3)
CREDIT REPORT
An investigation with the firm's banks of account was completed
in May 19hh» The institution at which the principal account is carried
reported that they hold a very high regard for the firm and believe that
it is entitled to full confidence. In other quarters, we were told that
the partners are well regarded, that operations have been fairly conservative and that the house is considered responsible.
SCOPE OF BUSINESS AND CONTACTS
It is felt that the firm's business is largely on an order basis
and confined to a few corporate and bank customers in the New York area,
some of which have dealt with the firm for many years. In recent years,
the business on the Stock Exchange has declined to nominal amounts and this
firm has not endeavored to build up an active over-the-counter business.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
CO P Y
SALOMON BROS. & HUTZLER
A partnership established in 1910 although there have been
several changes in the personnel since its inception.
NATURE OF BUSINESS
Dealers and brokers in U. S« Government securities, direct and
guaranteed; Federal Land Bank bonds; Municipal, Canadian Dollar, Public
Utility, Industrial and Railroad Securities and Railroad Equipment Trust
certificates; Industrial and Public Utility Preferred Stocks. Member of
the New York Stock Exchange.
PARTNERS
Herbert Salomon, Percy F. Salomon, B. J. Levy, Henry L. Rosenfeld,
Jr., Rudolf Smutny, Edward L. Holsten, Herbert I. Losee, Bertram F. Brummer,
Jonas H. Ottens, Franklin J. Grieder, James H. Carson, L. Eugene Marx,
Miles D. Perrin, Lloyd S. Miller, Theodore A. VonGlahn, Jr., Henry F,
Ludeman, Girard L. Spencer, William R. Salomon, Maurice Levy, Morton D.
Hutzler (Special) and Louis B. Tim (Special).
MAIN OFFICE
60 Wall Street, New York, N. Y.
BRANCHES
Boston; Chicago; Cleveland.
NET WORTH
$1;, 183,000 - (12/31A3)
CREDIT REPORT
At the time of our last investigation in June 19li3, full confidence was expressed in the ability and integrity of the management.
SCOPE OF BUSINESS AND CONTACTS
Transacts business on both a dealer and order basis. Most of
the firm's business stems from the New England, Mid-Atlantic, East North
Central and Far Western states and its customers are, for the most part,
of "long standing". It does, however, carry on a fairly active business
with investors in most other sections of the country, including security
houses.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
ASIEL & CO.
(PARTNERSHIP)
This business was established January 1, 1879* although,since
inception, numerous changes have occurred in the personnel.
NATUEE OF BUSINESS
Brokers in Railroad, Public Utility, Industrial and Foreign
Bonds. Member of the New York Stock Exchange and the Nev\r York Curb
Exchange*
PARTNERS
Nelson I. Asiel, Robert H. Wiite, Arthur Marx, Jacob C. Stone,
Hark C. lleltzer, Jr., L'orris VJeil, Solomon Litt, Jesse Boehm, David S.
Cooper, Gabriel Litt, John V/asserman, Samuel H. Rosenberg, Joseph D.
Croll, and Louis J. Werner.
MAIN OFFICE
11 Wall Street, New York, N. Y.
BRANCHES
Jersey City, N. J.
NET YJDRTH
02,731,000 - (10/31/143)
CREDIT REPORT
No investigation with the firm's banks of account has been made
since February 19l|2. At that time we were told that the firm has always
had an excellent reputation and is considered one of the outstanding houses
in its line.
SCOPE OF BUSINESS AND CONTACTS
Their business in U. S. Government securities is strictly on a
brokerage basis.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
COPY
MASON & CO. (PARTNERSHIP)
This partnership was formed July 2, 1906, at which time it
succeeded Kingsley, Mabon & Co., in which the late James S. Mabon and
S. Clifton Mabon were the partners. Since that time there have been
various changes in the partners of this firm.
NATURE OF BUSINESS
Bond brokers, specializing in Railroad, Public Utility, Industrial, Foreign and Government issues. Members of the New York Stock
Exchange and the New York Curb Exchange.
PARTNERS
S. Clifton Mabon, Roland L. DeHaan, Charles A. Greenfield,
Rudolph Nadel, Llabon Kingsley, John M. Maurer and Joseph C. Nugent,
and James B. Mabon, Jr.
MAIN OFFICE
115 Broadway, New York, N. Y.
BRANCHES
None.
NET
" • T:ORTH
$788,000 - (5/31/143)
CREDIT REPORT
An investigation with the banks of account in April 19k3,
elicited uniformly favorable comments. The opinion was expressed that it
is a conservative and eminently respectable house.
SCOPE OF BUSINESS AND CONTACTS
Their business in U. S. Government securities is strictly on a
brokerage basis.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL
(For use of the ad hoc Subcommittee on
Study of the Government Securities
Market, Federal Open Market Committee)
FEDERAL OPEN MARKET COMMITTEE RELATIONSHIP WITH
BROKERS AND DEALERS IN GOVERNMENT SECURITIES
Appendix B
(1) Letter, September 11, 19U4j from Chairman Eccles to Mr.
Sproul regarding nonqualifying dealers, maximum borrowing
by recognized dealers which should be countenanced, and
other matters.
(2) Letter, October 11, 19UU> from Mr. Rouse to Chairman Eccles
enclosing comments on dealers who did not qualify under the
Kay 15', 19bUj terms.
(3) Memorandum, November 1, 19UU> from Mr. Rouse to the executive committee of the Federal Open Market Committee on
dealer borrowings and positions and certain other matters
pertaining to dealers' activities.
(Ij.) Addendum, May 9) 19U6, to the above memorandum regarding
de ale r s' commi s s ions.
({?) Memorandum, February 8, 19U5>, from Mr. Piser to the Board of
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Federal Reserve Bank of St. Louis
Governors of the Federal Reserve System listing matters concerning relations between the System open market account and
dealers in Government securities which had been raised since
May l£, 1914^ and were still unsettled.
Appendix B
COPY
September 11, I9kh
Mr. Allan Sproul, President,
Federal Reserve Bank of New York,
New York, New York.
Dear Allan:
I have again been looking over the letter dated Hay 31, 19U±j that
you sent to me regarding the qualification of brokers and dealers by your
bank as agent for the System account. It seems to me that the report concerning the brokers and dealers who were qualified is entirely adequate but
that the information given concerning the dealers who failed to qualify is a
little sketchy. I believe, therefore, that the Executive Committee should
receive an analysis of the dealers who failed to qualify, along the same
lines as the analysis of those who were qualified. I presume that if any
broker or dealer is added to or removed from the qualified list the Executive Committee will be informed not only of that fact but of the reasons for
the addition or removal and will continue to receive a full report of each
meeting with the dealer group.
In thinking further about the relationship between your bank and
the dealers, it occurred to me that some additional information would be
helpful to the Executive Committee in discharging its responsibilities in
this matter. You Td.ll recall that the earlier drafts of the dealer terms
included a provision that the amount of borrowings by any one dealer should
not exceed ten times the net worth of such dealer. This suggestion was subsequently discarded on the grounds that the objective could better be attained by continuing the existing informal supervision over the position of dealers. It seems to me that the Executive Committee should be informed of any
action that is taken regarding the position of any dealer and the response of
the dealer to this action and should also be advised of any instances when
the position of a dealer reaches an abnormally high level. Perhaps ten times
the net worth of a dealer would not be a satisfactory measure, but I believe
that some maximum should be set and that any amounts above that maximum
should be reported.
Finally, I think that it would be helpful if the Executive Committee
were informed as to the amount of transactions for the System account with each
qualified broker and dealer. Recognizing that some dealers are particularly
active in certain types of securities, I suggest that this information include
the amount of tranaactions by types of securities. Probably one report a
month showing monthly totals would be adequate for this purpose.
I should appreciate it, therefore, if you would ask Bob Rouse to
send me the above reports. I think that copies should be sent to the other
members of the Executive Committee, if they desire them, and a copy each to
Air. Morrill and Mr. Piser.
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Federal Reserve Bank of St. Louis
Sincerely yours,
M. S. Eccles, Chairman,
Federal Open Market Committee.
STRICTLY CONFIDENTIAL
C O P Y
Appendix B
FEDERAL RESERVE BANK
OF NEW YORK
October 11, 19U;.
Dear Mr. Eccles:
In response to the suggestion in your letter dated September 11 to
Mr. Sproul, I am enclosing reports covering those brokers and dealers "with
whom we had been doing some business occasionally prior to May 1^, but who
did not qualify under the new terms. These reports are along lines similar
to those sent with Mr. Sproul's letter of May 31 covering the qualified
group. It is my understanding that the executive committee shall be fully
informed of the circumstances if any broker or dealer is added to or removed
from the qualified list by this Bank, as agent. As I reported to the last
meeting of the Federal Open Market Committee, there has been no change in
the original list of qualified dealers.
There has been no occasion recently for a meeting with representatives of the Government Security Dealer Group, the last meeting with this
group since May 15> having occurred on July 6, 19UU* Matters discussed at
that meeting are covered in the weekly report of open market operations and
money market conditions for the week ended July 12, I9hh9 under the heading
"Dealers' Subscriptions". As you know, we do not keep minutes of such meetings but the substance of the discussions, when they occur, will continue to
be reported in our weekly report of open market operations.
There are also enclosed statements showing the volume of transactions by classes of securities for the System open market account with each
qualified broker and dealer by months since May 13', 19U|. In regard to the
distribution of the business, you have in mind, of course, that it is related to the flow of business at the time and to the objectives to be accomplished by the transactions. Copies of these statements are being sent to
the other members of the executive committee and regular monthly reports will
be furnished the members of the executive committee hereafter.
The subject of borrowings by dealers and their positions in U. S.
Government securities will be discussed in the memorandum which we are preparing on the subjects pertaining to the Government security dealers brought
U
P by y°u at the last meeting of the executive committee.
Copies of the reports and statements attached are being mailed to
Mr. Morrill.
Yours faithfully,
Robert G. Rouse, Manager,
Encs.
System Open Market Account.
Honorable M. S. Eccles, Chairman, Executive Committee,
Federal Open Market Committee,
Board of Governors of the
Federal Reserve System,
Washington 25, D. C,
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Federal Reserve Bank of St. Louis
COPY
STRICTLY CONFIDENTIAL
R. W. PRESSPRICH & CO. - (PARTNERSHIP)
The firm as at present constituted was formed as of August 1,
19UO. The business was originally established in January 1909 but that
partnership was dissolved as of July 31, 19^0.
NATURE OF BUSINESS
Underwriters, Distributors and Dealers in U. S. Government,
Municipal, Railroad and Public Utility Bonds and Preferred Stocks. Also
does a general brokerage business as members of New York Stock and Curb
Exchanges.
PARTNERS;
Clinton S. Lutkins, Barrett Brown, Samuel G. Adams, Reginald W.
Pressprich, Jr., Norman K. Kara, Charles L. Bergmann, John J. Clapp, Jr.,
and Reginald W. Pressprich (Limited).
MAIN OFFICE
68 William Street, New York, N. Y.
BRANCHES
Boston; Newark, N. J.
NET WORTH
$1,278,000 - (8/31A3)
CREDIT REPORT
The last investigation was made in February 19)42. At that time
the partners were well regarded by the banks of account which stated that
they regarded it as responsible for its engagements.
SCOPE OF BUSINESS AND CONTACTS
Business is very small and on an order basis. Most of its customers are believed to be small commercial and savings banks within the
immediate vicinity of New York.
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Federal Reserve Bank of St. Louis
C O P Y
STRICTLY CONFIDENTIAL
BLAIR & CO., ING.
Blair & Co., Inc. was incorporated under New York laws April 20,
19)4.8 as Ban earner! ca - Blair Corporation. This company was formed as the
result of a merger in Lay 1929 of Banearner!ca Corporation and Blair American
Securities Corporation. The Bancamerica Corporation was originally organized in April 1928 as the investment affiliate of the Bank of America National
Association. The Company became a separate organization after the acquisition of the Bank of America by the National City Bank of New York in November 19319 at vvhich time the shareholders of the bank were given certificates
representing the shares formerly held pro rata with the shares of the bank.
NATURE OF BUSINESS
Underwriters, distributors and dealers in U. S, Government, State,
Municipal and Corporate Securities.
OFFICERS
Ashby 0. Stewart, Chairman of the Board - John R. Montgomery,
President - J. Edwards Baker, George J. Gillies, C. Marshall Wood*, George
B. Seager*, James J. Sullivan, and Frank B. Bateman, Vice Presidents - John
J. de Boisaubin, Secretary and Treasurer - C. Courtney Keller, Jr., John M.
Whitbeck and Walter B. Henricksen, Assistant Vice Presidents - Joseph F»
Hughes, Assistant Secretary and Assistant Treasurer.
#U. S. Government Bond Department.
MAIM OFFICE
UU wall Street, New York, N. Y.
BRANCHES
Buffalo; Chicago; Philadelphia; Pittsburgh.
NET WORTH
$1,528,000 - (12/31/U3), not including ^168,000 reserve for
contingencies.
dvEDIT REPORT
When the last investigation was conducted in April 19i;3> the
organization was readily obtaining its requirements on both a day loan and
collateral loan basis. At least one bank reported the parent company to be
a very substantial steady borrower on a secured basis. All the banks expressed a high regard for the organization, and its management.
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Federal Reserve Bank of St. Louis
COPY
STRICTLY CONFIDENTIAL
Note: From December 7, I9h3 to March 17, 19Ui, the Federal Reserve Bank of
New York did not transact any business vath Blair Securities Corporation, except in Treasury bills, due to a continued over-extended long
position in U. S. Government securities about which we had expressed
concern to their management on several occasions. On March 17, 19UU,
the Federal Reserve Bank of New York informed the Blair Securities
Corporation that, due to its unsatisfactory financial condition and its
failure to report promptly the very large contingent liability that
appeared in its annual statement, the bank would transact no further
business with it, at least until they had for a period of time - some
months - corrected their extended financial position.
BLAIR SECURITIES CORPORATION
Blair Securities Corporation was organized in 1939 under Maryland
laws. Although it was formerly a wholly owned subsidiary of Blair & Company,
Incorporated, a minority interest has been sold to several of its officers.
HATUKE OF BUSINESS
Dealers in U. S. Government, municipal and corporate securities.
OFFICERS
John R. Montgomery, Chairman and President - Benjamin R. Brindley,
J. R. Leininger, George B. Seager, George J. Gillies, James J. Sullivan, C,
Marshall Wood and Robert J. Tyson, Jr., Vice Presidents - John J. de Eoisaubin^
Secretary and Treasurer - Winslow M. Lowe, Assistant Treasurer and Assistant
Secretary.
IAIN OFFICE
kh V'all Street, New York, N. Y.
BRANCHES
Chicago; Cleveland; San Francisco.
NET WORTH
" $897,000 - (12/31/1*3)
CREDIT REPORT
(See Blair & Company, Inc.)
SCOPE OF BUSINESS AND CONTACTS
The firm has built up a moderate volume of business ?/hich is believed
to come largely from investors in the middle Atlantic, East North Central, and
Pacific states. The officers in charge were formerly associated with other
firms dealing in U. S. Government securities which provided them an entree
with many investors when the business was formed; also the business of Blair &
Company, Inc. in other securities probably provides them with contacts. Transacts business on both a dealer and order basis.
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Federal Reserve Bank of St. Louis
COPY
STRICTLY CONFIDENTIAL
J. B. ROLL & CO., INC.
Incorporated in September 1939 under New York laws.
NATURE OF BUSINESS
Dealers in U. S. Government Securities.
OFFICERS
John B. Roll, President - Stewart C. Morton, Vice President and
Secretary - Edward M. Fitzpatrick, Treasurer.
MAIN OFFICE
One Wall Street, New York, N. Y.
BRANCHES
Hone
KET WORTH
$110,000 (9/30/U3)
CREDIT REPORT
A checking was completed on June 6, 19UUj with this company's bank
of account which, apparently, has handled all clearings for the company since
the account v.ras opened in September 1939• Full confidence was expressed in
the company and its management and we were advised that the business is under
capable, conservative and experienced supervision. No day loans are requested by the firm.
SCOPE OF BUSINESS AND CONTACTS
Business believed to be confined to the Eastern Seaboard states,
largely the Second Federal Reserve District, with activity centering in
Treasury bonds, as most of its customers are savings banks, small commercial
banks, savings associations of various kinds, and trust accounts. With the
exception of odd lots, a good deal of its business is on an order basis.
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Federal Reserve Bank of St. Louis
C O P Y
STRICTLY CONFIDENTIAL
BRIGGS, SCHAEDLE & GO., INC.
Incorporated in November 19l;0, under New York laws.
NATURE OF BUSINESS
Dealers in Government Securities and Bankers Acceptances.
OFFICERS
H. Grescan Briggs, President - Thomas G. Schaedle, Vice President
and Treasurer - John L. MacFarlane, Secretary - Le Roy Roome and Walter E.
Suttmeier, Assistant Treasurers. The principals are former officers of
Discount Corporation.
luAIN OFFICE
hk Wall Street, New York, N. Y.
BRANCHES
None
NET ^ORTH
5131,000 - (11/30/143)
CREDIT REPORT
An investigation was completed June 2, 19UU, with the company's
bank of account which clears all transactions for the company. The investigation revealed that the management is considered experienced, capable and
conservative in its operations. The bankers say that the management is
meticulous in its dealings and all transactions are cleanly handled and that
they have full confidence in the company and believe it to be responsible
for whatever it undertakes. Inasmuch as the firm does no underwriting, there
is no occasion for granting it day loans.
SCOPE OF BUSINESS AND CONTACTS
Business small and largely confined to the New York area but it
appears to be steadily growing on a sound basis. Its customers include commercial banks, scattered nationally, a few savings banks and several large
corporations. Some of its larger customers, undoubtedly, deal vdth this
firm for the reason that they were contacted by the officers when they were
associated with Discount Corporation. Its business, with the exception of
moderate transactions in short term securities, is primarily on an order
basis.
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Federal Reserve Bank of St. Louis
C O P Y
STRICTLY CONFIDENTIAL
HARVEY FISK & SONS, INC.
Incorporated in New York in January 1937•
NATURE OF BUSINESS
Dealers in U. S. Government, Territorial and Federal Land Bank
Securities. Underwriters and Dealers in State, Municipal and Housing
Authority Bonds.
OFFICERS
Martin C. Grunwald, President and Treasurer - William E. Pollock,
Executive Vice President - H. Albert Ascher and Max E. Pollock, Vice Presidents - Edward F. ".rightsman, Paul J. Mahoney, Karl J. Panke and Theodore
P. Dixon, Assistant Vice Presidents - Ashmore L. L. Mitchell, Secretary Herbert E. Jordan, Assistant Secretary and Assistant Treasurer.
MAIN OFFICE
liO Wall Street, New York, N. Y.
BRANCHES
None
NET WORTH
$220,000 - (12/31 A3)
CREDIT REPORT
The company's banks of account, with which we completed an investigation in June 19liU> speak favorably regarding its reputation and management.
The business is said to be conservatively operated and the company is looked
upon as responsible for its engagements*
SCOPE OF BUSINESS AND CONTACTS
Several of the officers of this firm have been connected with the
Government Security Market for many years and it is felt that the majority
of its customers are those who have dealt consistently with these men over
a period of years. A large part of its business appears to be with savings
banks in New York State and the New England States, although it occasionally
gets a moderate volume of business from several of the larger commercial banks
in New York. The bulk of its business is on an order basis.
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Federal Reserve Bank of St. Louis
Appendix B
COPY OF MEMORANDUM
To:
Executive Committee of the Federal Open
L'arket Committee
From:
R. G. Rouse
November 1, 19liU
MEMORANDUM ON DEALER BORROWINGS AND POSITIONS IN UNITED STATES GOVERN1IENT
SECURITIES, COLMSSIONS PAID THE DEALERS ON TRANSACTIONS FOR THE SYSTEM ACCOUNT,
AND CERTAIN OTHER MATTERS PERTAINING TO DEALER ACTIVITIES, CONSIDERATION OF
YIHICH YJAS SUGGESTED BY CHAIRMAN ECCLES AT THE MEETING OF THE EXECUTIVE COMMITTEE
OF THE FEDERAL OPEN MARKET COMIIETTEE HELD IN WASHINGTON ON SEPTEMBER 21, 19l|i;
AMD IN HIS LETTER TO MR. SPROUL DATED. SEPTEMBER 11, I9kh
(1) Formal or informal recognition by the executive committee of commissions
paid on transactions on an apency basis for the System Open Market Account*
In the past year or more, all transactions on an agency basis for
the System Open Market Account in Treasury bonds and notes have been at a 1/6U
commission (0156.25 per #1,000,000). On transactions in certificates with
dealers for the account of their customers, we have followed the practice of
buying from or selling to the dealer the longer maturities of certificates at
a yield which permits the dealer to make a price differential of 0.01 per cent
in yield.
This has not always been true in the case of the shorter maturities
of certificates, as an 0.01 per cent in such cases does not permit the dealer
to make a reasonable profit.
As can be seen from the following table, the
value of 0.01 per cent per -$1,000,000 varies with the maturity and price of
the certificate.
Yield
Bid
9/28
Issue
7/82 C/I due 12/1/LOi
"
"
"
"
"
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Federal Reserve Bank of St. Louis
11"
"
"
"
"
"
"
2/1/15
Vi/15
" 5AA5
" 6/1A5
» 8/1/1.5
" 9/1/15
" 10/1A5
,l£S
.69
.7U
.7U
.77
.79
.81
-82
Approximate dollar value
of 0.0l£ per $1,000,000
on outstanding
certificates
$17-53
33.98
50.68
59.09
67.29
83.92
92.09
99.U3
-2-
A day loan costs the dealers about $27*77 per 01,000,000 which must
be deducted before the profit realized can be determined as well as the cost
of Federal funds if they are involved which amounts to about $10*2i2 per
$1,000,000. These charges are in addition to telephone charge tolls, salaries
and overhead.
As you know, one of the uniform trading practices which the dealer
group has adopted is that they shall trade only at the quoted market.
Inas-
much as we, at all times, are informed on the quoted markets, v/e have not been
concerned about the dealers making more than an 0.01 per cent on the longer
maturities since our purchases and sales are usually made at the in-between
prices. As an average, we would say dealers make between $>£0 and $70 per
$1,000,000 on transactions with us in certificates from which they must
deduct any charges.
The matter of commissions paid, on transactions for the System Open
Market Account has been reported to the committee on several occasions and we
have assumed that it met with the approval of the committee*
However, if it
is the judgment of the executive committee that it should formally instruct
us on this point, we would prefer that the instructions be broad enough to
permit us to operate within the range of a maximum commission, rather than at
set commissions for each type of security.
For example, the committee might
instruct this Bank, as agent, that on transactions for the System Open Market
Account the commission paid dealers shall not exceed 1/32.
(2) The annual statements of condition of qualified brokers and dealers might
include~"(l) holdings of Government securities by issues, (2) Government
securities borrovfed by issues, (3) borro¥d.ng from banks, trust companies,
and other financial institutions, (ij.) borrowings from officers and directors, (!?) borrowings from others, (6) loans to officers, and (7) net worth.
With the exception of the detailed lists of securities owned and securities borrowed, all of the above information is ordinarily obtainable from
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Federal Reserve Bank of St. Louis
-3annual statements such as the dealers have been in the habit of submitting to
us. The statements are prepared or certified by public accountants acceptable
to the Bank and we have confidence that the figures are presented in accordance
with sound accounting principles.
Dealers' long and short positions in U. S.
Government securities by groups of issues are reported to us on a daily basis.
Accordingly, ire do not feel that it is necessary to request specific
information as listed above, although under the terms of the signed agreements
we feel that we may ask for and obtain clarification of items appearing in the
statements or additional details as to holdings and borrowings by issues when
there is occasion for it. It is our practice to refer the financial statements
received from the dealers to our Credit Department which prepares an analysis
of them for the confidential use of the interested officers of this Bank. This
analysis usually includes a comparison of the principal balance sheet items
with figures of previous years as well as comments on any items which appear
unusual or for vhich there is not sufiicient information.
".e shall be glad to forward copies of these analyses as well as the
financial statements of the dealers to the Committee if it so desires.
(3) The Bank might encourage the dealer group to adopt rules of conduct.
As previously reported, the "dealer group" is an informal organization.
It gave consideration to the advisability of formally organizing early
in 19l|3* for the purpose of controlling practices which might result in criticism, "ath the aid of counsel, it arrived at the conclusion that such a step
Yrould be of no benefit to either the Treasury, this Bank, the market or itself
See summary of the discussion which took place on Fay 23, 19ii3> with the executive committee of the dealer group attached to the statement regarding the relationship between the Bank and the dealers in U. S. Government securities submitted to the meeting of the Federal Open Market Committee held October I8,19ii3»
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Federal Reserve Bank of St. Louis
-uand that to put teeth into such an organization it would be necessary to adopt
policies and rules resulting in price fixing and other practices which would
run afoul of the anti-trust and other laws. The dealers felt that the same
objectives could be accomplished by each member of the group refraining from
any practices that would be bad for the market or that might bring criticism
on the group.
In the report dated February 1, 19Ui, we reviewed various requirements, suggested by Chairman Eccles in. a memorandum dated October 6, 19h3> many
of v/hich were rules of conduct, including the rule that, "recommendations to
any client to buy, sell or swap shall be made only on the request of the client,
shall be made only by a senior member of the firm, and shall be on an investment
basis and not on a speculative basis." It was concluded, after consultation with
counsel, that, although this rule is unquestionably a desirable rule of conduct,
it is not now imposed by law regarding transactions not Involving U. S. Government securities, whore abuse is much more possible, presumably because of impossibility of enforcement and, therefore, it seems inappropriate for the
Federal Reserve System to try to impose such a requirement regarding transactions of brokers and dealers with persons other than the Reserve Bank.
As pointed out, both in the report submitted to the meeting of the
Federal Open Market Committee on October 18, 19^3 and in the report dated
February 1, 19Uit,*~we have not only encouraged the dealers individually to adopt
desirable rules of conduct, but have encouraged the dealer group to strengthen
its organization and to endeavor to eliminate market practices which might bring
about results that rightfully or wrongfully cause criticism.
It was also point-
ed out in these reports that various trading practices and rules of conduct have
* Report and Recommendations regarding Relationship between the Federal Reserve
Bank of New York and dealers in U. S. Government Securities.
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Federal Reserve Bank of St. Louis
-5been informally adopted by the group. Up to this time, the dealer group has
policed itself and appears to have handled effectively all violations that
have been reported to its policing committee whether the violators were small
or large dealers.
Under the existing circumstances and in view of the fact that the
dealers who have been recognized by us have carried on a large and successful
business over a number of years without any specific charge of malpractice
against them, we feel no further action is necessary or warranted at this time.
(It) It might be advisable for the executive committee to have on hand specific
examples of any abuses by dealers, including names and dates.
r
.Ve could have no objection to the executive committee requesting the
Reserve Bank Presidents to furnish it with a report of any abuses, the facts of
which are brought to their attention, and which may be harmful to the market or
violate the terms of the agreements signed by the recognized dealers.
However,
it would be undesirable to give credence to every rumor which develops in the
market and to launch charges or make investigations based on flimsy evidence.
This Bank would assume that if the committee solicits reports of abuses they
will be authenticated in so far as possible and forwarded to this Bank for
further investigation.
(£) The establishment of maximum levels for dealers' positions in U. S.
Government Securities.
Dealers' borrowings and long positions are closely interrelated.
To the extent that borrowings are against U. S. Government securities, a limit
on borrowings limits positions, and vice versa, a limit on positions limits
borrowings. The suggested requirement that "the amount of borrowings by each
dealer shall at no time exceed ten times the net worth of such dealer" was
discussed in the report dated February 1, 19U-J. (pages 8 and 9) titled "Report
and Recommendations Regarding Relationship between Federal Reserve Bank of
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Federal Reserve Bank of St. Louis
-6New York and Dealers in U. S. Government Securities." As you know, the Executive Committee decided not to include this requirement in the signed agreements
formalizing our dealer relationship but instructed this Bank, as agent, to continue its informal supervision over borrowing. We firmly believe that this action was the correct one and that we should not include among our requirements
any rule or regulation which would interfere with the normal business relations
of the dealers with others. The reasons set forth in the report dated February 1, 1-9hhy as to why a ceiling on dealers' borrowings is inadvisable are
equally as valid as regards a ceiling on positions.
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Federal Reserve Bank of St. Louis
A summary of our opinion in this natter follows:
1. Inasmuch as our contracts with dealers are completed by
physical deliveries against Federal Reserve funds, our
risks, other than the possibility of receiving counterfeit or altered securities, are market risks incident to
the failure of the dealers to accept or to deliver securities pursuant to their contracts.
2. If positions were to be limited, it would tend to restrict
the floating supply of securities and night very well have
an adverse market influence under changing conditions.
There are times when it is helpful to the market, the
Treasury and the System for the dealers to take very
large positions and any limit imposed would have to
allow for such occasions. For example, the dealers were
helpful in absorbing a very large part of the supply that
preceded and accompanied the Fifth Var Loan Drive by increasing their positions which they were able to reduce
in a very short period following the issue date of the
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Federal Reserve Bank of St. Louis
-7market issues offered in the Drive* A considerable
percentage of the securities taken by dealers at that
time consisted of securities which we normally do not
purchase for the purpose of supplying reserves or which
could not have been bought in the interest of a pattern
of rates.
3. A position ceiling established high enough to permit
dealers to meet the situations mentioned above, would
probably be too high to be continuously effective and
might expose us to situations that v;e would rather
avoid. For example, the dealers might consider that such
a limit was safe and that we would have no objection to
their reaching it at any time.
It.
Commercial banks making loans to dealers of the type
with which we are doing business do not in most cases
know tho dealers'total position at the time. Nor do
they usually know the amount of their aggregate borrowings except on the date of their annual financial statement which they receive. At the present time, we understand that commercial banks generally are willing to lend
the dealers at 3/k P^r cent with a 2 point margin for securities in excess of 1 year and at 3/8 to 1/2 per cent
on the one-year-and-under group, frequently YJith no margin requirement other than the interest accrued on the
securities.
The present margin requirements permit a
dealer to carry a far larger position than would be considered reasonable and, after making allowance for
-8working balances and physical assets, provides a borrowing capacity in excess of i;0 times capital.
£. Generally the aggregate position except from money
market considerations does not concern us as much
as the dealers1 position in certain classes or
maturities of securities.
For example, we might
be more concerned if a dealer had a position of
25> million in long partially tax-exempt bonds than
if he had a position of 100 million in certificates.
An over-all ceiling on positions would put us at a
disadvantage in correcting undesirable positions in
certain classes or maturities of securities.
Although we are opposed to including a ceiling on borrowings or
positions among our requirements, we recognize that the executive committee
and this Bank, as agent, have a responsibility to see that no dealer gets
into a position so extended as to impair his effectiveness or to cause him
to become a disturbing market influence. In our opinion it is on matters of
general policy, such as this, that the committee should express its views and
that the details of the application of such policy should be made the responsibility of this Bank.
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Federal Reserve Bank of St. Louis
Appendix B
COPY OF LEMORANDUM
May 9, 19U6.
TO:
Executive Committee of the Federal Open Harket Committee
FROLI:
R. G. Rouse, Manager, System Open Llarket Account
(ADDE1JDULI TO IIY LEI.IORANDUL: TO YOU
DATED NOVEMBER 1, 19Ul.)
At the meeting of the executive committee of the Federal Open Market Committee on February 28, 19U6, Chairman Eccles suggested that the executive committee consider the desirability of paying no commissions on System
Open Llarket Account transactions with dealers in Government securities. The
reasons stated by the Chairman were substantially as follows:
This "whole matter should be considered in. the light of the
changed conditions existing at the present time. The question cannot be settled today but it should be studied, along with the position that the dealers now occupy, so that the committee would have
before it the reasons why the Federal Reserve Banks should pay commissions and why they sho .JLd not. The Federal Reserve Banks are
not in the position of purchasers or sellers of securities in the
usual sense. If the market can take the securities offered, the
Federal Reserve Banks do not want thera. If the Reserve Banks buy
securities the dealer should get his commission from the person who
sells, and if the Banks sell the dealer should get his commission
from his purchaser. The Federal Reserve Banks should be a place of
last resort when securities are offered on the market. Securities
are sold to the Reserve Banks because the System is supporting the
market in accordance with a known general policy and when the broker comes to the Federal Reserve Banks it is more in his interest to
sell to the Banks than to someone else. There should be no incentive to the dealer to go out and purchase securities for the purpose of selling them to the Reserve Banks and if no commissions were
paid that would be the case. T..*e must realize that under present conditions there is not a natural market and the position of the dealers must be analyzed in that li^ht.
In discussing Chairman Eccles1 suggestion it might first be said that
transactions in Government securities consummated in the market for the System
Open Llarket Account fall into two categories, i.e., those initiated by the
System and those initiated by others. In the case of transactions initiated by
the System in the practical administration of the Account or for the purpose of
expanding or contracting bank reserves or of stabilizing prices, the System
could not rightfully expect dealers to buy or sell securities for it and at the
same time receive their remuneration for this service by charging the third
party a commission. As a matter of fact, the System would have little choice
on such transactions as to the basis on which the third party would prefer to
do business. Furthermore, if the System permitted the dealers to act as principal on such transactions, it would have no control over the amount of profit
which might accrue to the dealer. On the assumption that the System will continue to pay the commission on transactions initiated by it,the following comments relate to the transactions initiated by others.
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Federal Reserve Bank of St. Louis
TO:
-2Executive Committee of the Federal Open Market Coroir.ittee
Hay 9, 19U6.
FROM: R. G. Rouse, Manager, System Open Larket Account
The question of -whether the System pays the commission or requires
the dealer to obtain his commission from the third party on transactions initiated by the third party depends upon the objectives desired by the System.
For example, if the System paid the dealer 100 plus a commission of l/6Li, the
customer would receive 100 for the securities sold and the market would be
quoted 100 bid. If the System paid 100 net (no commission) the dealer in order to obtain his remuneration of, say 1/6U of a point, would pay the seller
100 less l/6h commission and would quote his market at 99 63/6U bid. In both
cases, the dealer would make 1/6U but the effect of the System purchase in the
first instance is a higher price to the seller and a higher market quotation
than in the second instance. Consequently, if the System wished to have a
par bid maintained in the market it would have to pay either 100 plus 1/61;
commission or 100 1/6H net. In either case, the cost to the System would be
the same. However, if the dealer collects his commission from a third party,
the System's control over the amount of profit which the dealer makes would
have to be in the form of an agreement with the dealer. Normally in such
cases the dealer, acting as principal, would be free to charge whatever commission he felt desirable from the third party and the System would have no
knowledge of the amount charged. Both of these factors appear to be good
reasons for the System to continue its present practice of paying the dealers1
commission.
The incentive for the dealers to solicit from their customers business which could be reversed with the Reserve Banks would be restricted generally to the dealers being able to recommend to their customers specific market
operations likely to prove profitable rather than to the willingness of the
System to pay the dealers' commission. The area for such solicitation is greatly circumscribed by the fact that most of our operations are in Treasury bills
and certificates. Furthermore, unless a dealer's recommendations proved profitable to his customers, at least over a period of tine, he would have no influence over his customers1 operations in the market. On other occasions, when the
dealers' customers initiate the business, it is merely a question of the dealers' willingness or ability to consummate transactions at quoted prices. In
such cases the open market policy of the System, rather than the payment of
dealers' commissions by the System determines whether the transaction -will take
place with us or not. It should be remembered, also, that the terms and conditions to which the qualified dealers have agreed in writing restrict, in effect,
the dealers from soliciting transactions with their customers for the purpose of
reversing the transactions with the System, unless otherwise requested by the
System,
Although in one sense the present government security market is not
a natural market, but one which we support and maintain, it is to our advantage to have it preserve as much of its free characteristics as possible so
that we shall be called upon only as residual buyers. Efficient, effective
market machinery is required and is supplied by the government security dealers. So long as we wish to make use of this machinery, and so long as the
commissions we pay are neither extravagant nor excessive, there would seem to
be nothing to be gained by transferring the cost of all of our operations, not
to the dealer, but to his customers.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL
Appendix B
COPY 0? IISMORANDUM
February 8, I9k$
To:
Board of Governors
From:
L. II. Piser
Subject:
Government security dealers
Several matters relating to Government security dealers were discussed in a letter dated September 11, 19UU, from Chairman Eccles to Hr«
Sproul and at the meeting of the Executive Coirmittee on September 21, 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, Hr. Rouse reported that the New York Reserve Bank has encouraged 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. First,
the Chairman suggested that the Executive Committee should be advised of any
instances when the position of a dealer readies an abnormally high level and
also should be advised of any action that is taken by the New York Bank regarding the position of a dealer and the response of the dealer to this action. The Chairman also mentioned that the earlier draft of the dealer terms
included a provision that the amount of borrowings by any dealer should not
exceed ten times his net worth, that this provision subsequently was discarded on the grounds that the objective could better be attained by continuing
the existing informal supervision over the position of dealers, and that,
although ten times the ret 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. l.r. Rouse's reply to
this suggestion was that the amount of dealer borrowings should not be limited
by any rule or regulation and that, on mattors of general policy such as this,
the Executive Committee, in his opinion, should 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 should
recognize at least informally the present commission of 1/6U 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 should establish a commission of
perhaps 0.01 per cent on transactions in certificates. Regarding the latter
part of this suggestion, Ivlr. Rouse felt that a differential of 0.01 per cent,
while reasonable on the longer maturities of certificates, vrould not permit
the dealers to make a reasonable profit on the shorter maturities. He suggested that, if the Executive Committee wishes to issue formal instructions, the
instructions should be sufficiently broad to permit the Bank to operate within
the range of a maximum commission rather than at set commissions for each type
I/ See letter from Lr. Rouse to Chairman Eccles dated October 11, 19hh, attached.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL
To:
Board of Governors
From:
L. k. Piser
-2-
February 8, 19i£
of security and that the instructions might limit the commission to no
more than 1/32 of a point.
Third, the Chairman suggested that the annual statements of
condition of qualified dealers and brokers should include the following
items: (1) holdings of Government securities,by issues, (2) Government
securities borrov/ed, by issues, (3) borrowings from banks, trust companies, and other financial institutions, (1;) borrowings from officers
and directors, (5>) borrowings from others, (6) loans to officers and
directors, and (?) 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 dealers' long and short positions by
groups of issues are reported to the Bank on a. daily basis. He suggested 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
should 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 are 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, Lir. House suggested that, if such reports are made, they should be authenticated in so far
as possible and forwarded to the Bank for further investigation.
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Federal Reserve Bank of St. Louis
STRICTLY COIIFIDENTIAL
(For use of the ad hoc Subcommittee on
Study of the Government Securities
Market, Federal Open Market Committee)
Copy
FEDERAL OPEN LIARKET COMMITTEE RELATIONSHIP VITH
BROKERS AMD DEALERS IN GOVERNMENT SECURITIES
Appendix C
(1) Letter, April 2, 19U8* from Governor Szymczak to Kr. Rouse
containing a digest of letters arid discussions v/ith representatives of Viim. E. Pollock and Co., Inc., a nonqualified
dealer.
(2) Memorandum, April 16, 19U3> from LIr. Rouse to Confidential
Federal Open Market Committee Files concerning discussion
held with Mr. Pollock of Yfm. E. Pollock and Co., Inc.
(3) Memorandum, April l£, 19^8, from Lir. Rouse to the Federal
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Federal Reserve Bank of St. Louis
Open Ilarket Committee summarizing developments in the
relationship of the Federal Reserve Bank of New York with
dealers in Government securities between 1939 and 191$*
Appendix C
COPY
April 2, 19U8.
Mr. Robert G. Rouse, Vice President,
Federal Pie serve Bank of New York,
New York U5j New York.
Dear Bob:
At the last meeting of the Federal Open Market Committee, there
was some discussion of the rules relating to the qualification of dealers
in Government securities with whom your Bank transacts business for the
System account, and I understand that you are preparing a memorandum on
this subject for consideration at the next meeting.
At my request Bill Pollock wrote me what he had been telling me
for some time, and I quote several paragraphs from his letter:
"At a dinner sponsored by a few of the larger dealers in
the early part of 19illj a government bond group was created,
consisting of two New York Banks and all Now York firms who,
at the same time, dealt in government bond issues. No rules or
regulations were prescribed at the time of organization. Dealings with the Federal Reserve Bank were had by any and all
houses, based on their individual contacts and knowledge of the
U. S. Government Bond business.
"Since formation of the group, trading activity began to
show various changes - competitive and initiative spirit was
being supplanted by personalities involving contact with the
Federal Heserve Bank.
"Step number one was established through the repurchase of
Treasury Bills by the Federal Reserve Bank at a prescribed commission instead of at a price against average established by
weekly sales and therefore making it a riskleso business for
those dealers and banks who either were not equipped to bid
properly or who did not have the a.bility to e::ercise judgment
in auction bidding and thereby vrere guaranteed against any possible losses caused by faulty bidding. "Vith the seed planted
through this operation, it wasn't long before contact instead
of knowledge of the II. S. Government business seemed to find
favor with the Federal and made Government Bond trading quite
riskless and encouraged numerous houses to start Government
Bond Departments. Because of increased activity through war
financing and the growing number of government dealers, new devices had to be developed by the Federal Reserve Bank and an
Open Harket group was formed and designated as the only body of
dealers who might henceforth do business with the Federal.
"Various regulations were imposed which would serve to keep
out many dealers and at the same time, two out-of-town banks were
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Federal Reserve Bank of St. Louis
Mr. Robert G. Rouse
-2-
requested to join to give balance to a Dealer-Banker group
comprising the Open Market group. Though these regulations
were quite spacific, some of the rules were not strictly pnforced and tv;o of the banks disclaimed any intention to carry out some technical terms of their agreements. It soon
became a habit not to make or maintain markets in all Government Bond issues but only when it suited individual dealers
in relation to their positions in the market. Independent
brokers gained prominence and were used to manipulate quotations, so that dealers themselves could not be accused of
being unnecessarily aggressive or disturbing to an orderly
market such as was desired by the Federal Reserve Bank.
"In due course, one Government Bond house was dropped
from the Open L.arket group because it refused to comply with
a request made by the Federal Reserve Bank to cut down its
portfolio.
"Just very recently, another New York Bank was requested
to join the Open Market group to further balance the BankerDealer set-up.
"Since the inception of the U. S. Government Bond Dealer
group, a detailed report to the Federal embodying all positions, the type and character of consunanated business and all
particulars that may reflect all our markets and give the
Federal a clear cut picture of all these important factors,
was our daily function and our firm was most diligent in this
service without any question on our part or without seeking any
special favors. Even vfhen the group within the group was formed,
known as the Open L-iarket group, we continued to maintain our
relations with our customers,as well as the Federal Reserve Bank,
to the best of our ability under those circumstances.
"When the emergency period arrived and peg prices vrere resorted to, those of us who were not in the inner circle found
the door to the Federal completely closed, the latter not only
failing to help us through that period but actually creating
new regulations for their Open Ilarket group vjhich made it almost impossible for us to be of service to our clientele which
we have spent a business life-time to build up.
"If the period of emergency continued for a longer stretch
of time, the Federal Reserve Bank would have been instrumental
in putting several government bond dealers out of business. If
that had been the ambition of those in charge, they came close
to achieving it. As the bond market improved and the avalanche
of selling subsided, a few of us were finally told that once
again we nay do business for agency accounts in a moderate
form."
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Federal Reserve Bank of St. Louis
Mr, Robert G. Rouse
-3-
Referring to the provision of the Committee's rules concerning qualified dealers which relates to willingness to make markets,
the letter goes on to recommend, in effect, that willingness and ability to make and maintain markets be made a determinative factor in the
qualification of dealers. The opinion is expressed that the application of this test would solve the problem of possible additional administrative work resulting from an increase in the number of qualified dealers, because 90 per cent of the would-be Government bond departments would not and could not maintain adequate trading markets*
As a means of applying this test, the letter suggests "an agreed unit
of at least ^100,000 throughout the list and possibly some formula as
to the number of minimum personnel required in a bona fide Government
bond department."
A subsequent letter states that, of the eleven members of
the Open Market Group, actually only six dealers try to maintain markets in restricted Government issues. It also mentions that there are
at least £00 municipal bond dealers against a total municipal indebtedness of tY/enty billion dollars, that over 1300 dealers engaged in floating a 2^0 million dollar issue of Yforld Bank bonds, and that there are
only two men at the Federal Intermediate Credit Bank office who handle
over UOO dealers in connection with monthly F. I. C. issues.
I am bringing this to your attention because I am sure that
you will want to consider it, if you have not already done so, in connection with the preparation of your memorandum, ".hen you are next in
Washington, I Tail be glad of an opportunity to discuss this matter
with you; or better yet, Yfhy not have Bill Pollock amplify his statements by coming in to see you at the Bank.
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Federal Reserve Bank of St. Louis
Kindest personal regards.
Cordially yours,
1,1. S. Szymczak.
Appendix C
G 0 PJf
OFFICE (DESPONDENCE
To
Confidential Federal Open
Karket Committee Files
Federal Reserve Bank
of Hew York
April 16, 191$
From R. G. Rouse
Referring to the attached letter from Governor Szymczak
quoting excerpts and summarizing letters -which he had received
from William Pollock of IVilliam E. Pollock and Company, Inc., I
followed the suggestion made therein and asked Lir. Pollock to
cone in and amplify his statements which v/ere not clear to us.
Ivir. Miller and I spent an hour and a half going over with him
his statements to Governor Szymczak and discussing each point
as set forth in the letter. Lir. Pollock disclaimed any idea of
intimating that we had any special friends among the dealers
with vjhoin. we do business, for other than justifiable reasons,
for System Open Llarket Account, and stated that his sole purpose in taking up this matter with Governor Szymczak was not
to embarrass us but rather to try to have the rules amended so
that his firm would have direct access to us as a qualified firm.
Mr. Pollock's letter contains many statements which, as far as
Mr. Lliller and I are concerned, are not true and represent either
a twisting of the truth or a lack of understanding on his part as
to the real facts.
However, I made it clear to Ivlr. Pollock that the situation with respect to certain unqualified dealers, including his
firm, is now under consideration by this Bank and. by the Federal
Open I'arket Committee but that, as far as this Bank is concerned,
it believes one of the basic requisites of a qualified dealer is
the making of primary markets on a nationwide basis. This I told
him is impossible unless the dealer has adequate available capital. I explained that I thought the making of primary markets
under conditions as they exist today requires considerably greater capital than was the case four years ago at -which time I told,
him I thought the minimum amount of capital that would be necessary was -v500,000. In making that statement in I9hhs I did not
commit ourselves to that specific figure but expressed the view
that under the then existing conditions, there would be no use
considering an application of a dealer to qualify unless at least
that amount of capital were pledged to the business. I also remarked to Ivlr. Pollock that it would be possible for him to raise
sufficient capital and to develop national scope of business; that
he knew the requirements and is free to work toward that goal.
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Federal Reserve Bank of St. Louis
APPENDIX C
C O P Y
RECENT DEVELOPMENTS IN THE RELATIOUSHIF OF
FEDERAL RESERVE 3ANII OF LOT YORK WITH
DEALERS IN UNITED STATES GQVS..NIJ^T SECURITIES
Review of Policy in the
Relationship of the Federal Reserve Bank of New York
with Dealers in United States Government Securities
Procedure Developed, by Federal Reserve Bank
of New York in 1939
Late in 1939 this Bank made a careful review of its relationships
with the United States Government security dealers. On the basis of the
recommendations made by the officers at that time, this Bank's Board of
Directors passed a resolution on November 2, 1939 laying down a specific
policy governing certain phases of the relations of the officers of this
Bank with the market, that is to say, with the Government security dealers.
This resolution provided a policy requiring this Bank to execute orders for
the purchase and sale of United States Government securities, through ordinary market channels, with or through "recognized dealers" — an internal
designation. Such a dealer was defined for this purpose as "a firm or
corporation, including a bank, which is a specific dealer or broker in
United States Government securities, or bills of exchange and bankers acceptances, or other securities, ancn which has furnished to this Bank a
recent statement of assets and liabilities shoving to the satisfaction of
this Bank that such firm or corporation is a substantial dealer and has,
in the judgment of this Bank, adequate capital and is otherwise in satisfactory financial condition." The principal factors which this Bank considered in extending such recognition were the fo3J.oTd.ng:
1) Reputation for integrity, experience, and knowledge,
2) capital at the risk of business,
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Federal Reserve Bank of St. Louis
-2-
3) willingness to nake markets under all ordinary conditions and
to take positions, both long and short, and
U) a large volume of national scope with the contacts which such
trading provides.
The designation of recognized dealers was left to the discretion
of the President and/or First Vice President of this Bank, and five dealers and two dealer-banks were designated as recognized dealers, in accordance with the stated policy*
'.Vithin certain limits, the resolution referred to above permitted
this Bank to effect transactions in United States Government securities
through responsible concerns, including banks, other than those recognized
dealers when in the judgment of the President, the First Vice President, or
the Vice President in charge of the Open Market Function of this Bank, such
a course would properly aid in the execution of System Open Market policy
or Fiscal Agency transactions.
Under this authority there ivere at that
time eight such dealers and two out-of-town dealer-banks v;ith which this
Bank might transact business. Some of these dealers functioned as did
recognized dealers, in that they carried some portfolio, while others with
slight capital resources, conducted for the most part an order business.
Prior to our entry into the war in December 19Ul> our contact with
the unrecognized dealer group was an informal one, maintained because the
volume of business done by those firms was, in the aggregate, such that we
felt it advisable to keep in touch with them. In return for information
supplied by them as to important transactions and general market conditions,
which they believed would help to keep us informed on the day-to-day factors
at work in the market, we reciprocated at times by giving them a small amount
of business directly when we were in the market and when their bids or offers
were satisfactory, keeping such business within the limits dictated by the
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Federal Reserve Bank of St. Louis
-3capital position of the respective firms.
There followed a period of change in personnel and organization in
some of the dealer firms, both recognised and unrecognized, with several of
the smaller houses, to which recognition had not been extended, doing a
somewhat larger volume of business. No changes, however, were made in the
number or names of recognized dealers.
Action by Federal Open karket
Committee in 19iUi
Yath the increase in Government debt in the earlier years of the
war, trading volume in United States Government securities increased substantially and the volume of System transactions also expanded. The Federal
Open Market Committee recognized that operations for the System Open Liarket
Account were becoming, and promised to continue, so large and so important
in their effect upon the market that it should be prepared, as a natter of
record, to justify the procedures followed in dealing mth the market.
In
meeting its responsibility for the determination of the relationships between the System and the United States Government security dealers, the
Federal Open Liarket Committee undertook a thorough study of the System-dealer
relationships with a view to establishing a procedure for the Hew York Bank
to follow in acting as its agent, having in mind:
1) The growing importance and function of the dealers in United
States Government securities,
2) the degree of influence exercised over the dealers, and
3) the possible need for regulation and for additional information.
In Kay I9hh the Federal Open Liarket Committee, after prolonged consideration, approved a statement of terms on which this Bank, as agent, would
transact business with brokers and dealers in United States Government securities for the System Open Market Account.
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Federal Reserve Bank of St. Louis
This statement, in its final form,
-Urepresented a forrnalization of the relationship v\rhich this Bank had previously had vdth the principal dealers in United States Government securities.
In taking this action, the Federal Open Karket Committee delegated
to the executive committee, the authority to make such changes in the form
of the statement of terms as appeared to be desirable, to make the terms
effective at such time as, in the judgment of the executive committee appeared to be desirable, and to issue such instructions to the New York Bank
in connection therevdth as might be required.
On llay 6, 19UU* the executive
committee instructed the Federal Reserve Bank of New York in detail with
respect to the new procedure. A statement of these instructions and the
terms on which the Federal Reserve Bank of New York •will transact business
Yvdth brokers and dealers in United States Government securities for System
Open Karket Account are given in an attachment.
Pursuant to the instructions
issued on May 6, 19 Ui., the Federal Reserve Bank of New York concluded by
May 15, 1914; agreements with all brokers and dealers who, in the opinion of
this Bank, met the qualifications developed by the committee. These firms
consisted at that time of the following:
For Over-the-Gounter Business
Bankers Trust Company
C. F. Childs £ Company, Inc.
Continental Illinois National Bank
and Trust Company of Chicago
C. J. Devine and Company, Inc«*
Discount Corporation
The First Boston Corporation
The First National Bank of Chicago
Guaranty Trust Company of New York
Harriman Ripley and Company, Inc.
D. T\f. Rich and Company, Inc.
Salomon Brothers and Hutzler
-x- Incorporated January 1, 19U5- after earlier reverting to a partnership
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Federal Reserve Bank of St. Louis
-5Brokers on the New York Stock Exchange
Asiel and Company
Charles E. Quincey and Company
Mabon and Company
Salomon Brothers and Hutzler
Since that time Blair and Company, Incorporated and Chemical Bank and Trust
Company were accepted as a qualified dealer and dealer-bank, respectively;
Harriman Ripley and Company, Incorporated has withdrawn from the Government
securities business and D« W. Rich and Company, Incorporated has been removed from the list of qualified dealers.
There \rere, at that time, five other dealers with whom this Bank
had done business occasionally in limited volume but who did not clearly
qualify because of the relatively small volume and restricted scope of
their business and the limited amount of capital at the risk of their business. These dealers were:
Briggs, Schaedle and Company, Inc.
Harvey Fisk and Sons, Inc.
R. W. Pressprich and Company
C. E. Quincey and Company
J. B. Roll and Company, Inc.
The Federal Reserve Bank of New York took the position at that
time that "it was considered inadvisable to include even dealers with whom
some business has been transacted at times in the past if they did not clearly qualify under the "written terms and conditions now effective." It believed that the line of demarcation must be as clearly defined as possible
if System practice is to be understood and defensible and if future requests
for qualification are to be capable of determination. We continued, however,
to do a small amount of business with these five firms on purchase and sale
orders this Bank received for accounts other than the System Open Market
Account. Since 19kh Harvey Fisk and Sons, Inc. was dropped from that list
for cause, R. W. Fressprich and Company was removed from the list yzhen that
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Federal Reserve Bank of St. Louis
-6firm retired as a dealer in United States Government securities, and
William E. Pollock and Company, Inc., a new firm organized January 2, 19i£j
i;as added to the list.
Recent Experience
T7e have now had some four years experience with the procedure
set up by the Federal Open Juarket Committee. On the whole, it has operated smoothly under most market conditions.
At the time the whole subject
was reviewed in I9h3-hh) the committee endeavored to prescribe terms which
would define the limit within which this Bank, as its agent, might qualify
dealers and dealer-banks, so that the committee would always be in a position to answer questions concerning the method, as well as the purpose of
our open market transactions. At that time it was anticipated that an
important problem might be the number of banks (as well as others) which
might wish to become dealers in Government securities, thus creating an
administrative and operating problem. This problem has been a minor one.
The failure of the situation to develop to the extent anticipated may
perhaps be attributed in large part to (a) the relative ability of commercial banks with trading departments to operate independently of "qualification" in the kind of Government securities markets which have prevailed
up until the last six months, and (b) recognition of a sound and consistent
basis in the committee's terms and qualifications.
There has been a certain pressure to qualify smaller firms and
a determined effort on the part of some of them to bring their organizations within the scope of the committee's terms.
These firms, however,
do not make primary markets in Government securities on a national basis
and this bank has not transacted business with them for System Account
under the existing rules and regulations.
These rules, growing out of
experience, are based on the principle that operations for System Open
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Federal Reserve Bank of St. Louis
-7Llarket Account should be concentrated upon the residual supply of, or demand
for, securities "which cannot be cleared by the market. That means dealing
only -with those firms which are national factors in the market, since these
provide the central point of activity through which the major portion of
the operations of buyers and sellers are cleared, and at "which most of the
residual transactions come to rest.
In this way, it is possible to maximize
the System Open Market Account operations with a minimum of transactions
since they are directed at the gap between market demand and supply rather
than at the full magnitude of the market on both sides.
The unusual market conditions which developed late in 19U7, the
System policy of buying and selling Treasury bonds only on an agency (commission) basis, and the established procedure of dealing only with qualified
firms, all created a situation, new in degree if not in kind, in our relationship with the market.
This situation was most severe at the end of 19 U7 and in the early
weeks of 19^8 when System intervention on an extraordinary scale was required to clear the market of offerings of Treasury bonds and when Treasury investment accounts withdrew from the market as buyers* In order to obtain
our full support price, sellers tended, to channel their business through
those dealers who, by the reason of their qualification to deal with the
System Open Llarket Account, were in a position to give immediate execution
to orders.
In this circumstance, firms which did not have access to the
System Open Market Account were able to function with the usual profit margin only to the extent that outside buyers could be found who were willing
to pay better than the support price.
This resulted in some protests, voiced mainly by the smaller firms,
against the competitive effect of the procedures in force. The protests included the assertion that current credit aid debt management policies of the
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Federal Reserve Bank of St. Louis
-8Federal Reserve System and the Treasury had created a situation in which
the System was the primary factor in matching demand and supply in all
issue classifications of Government securities. It was further claimed
that a dealer who had no recourse to the System Open Market Account, was
at an increasing disadvantage in his daily operations, especially with
respect to Treasury bonds which are the chief source of his income. Unable
to wash their business through the System Open Market Account, these dealers
asserted that they were faced with a declining volume of business and a
possible impairment of long standing customer relationships. Dealer protests against the conpetitive effect of procedures in force deserved a
hearing.
The position this Bank has taken is that present System policy
clearly implies that open market transactions for the System will be restricted to those dealers in the market having a large volume of business of national scope, and is calculated to preserve a private market in Government securities, in which brokers and dealers, both large and small, will normally participate, and in which the System's participation will be kept to a minimum
consistent with its objectives in the field of credit policy and in support
of the Government security market.
It remains to be determined whether any convincing basis exists
at this time for widening the group of qualified dealers, either through a
relaxation of this Bank's interpretation of the committee's terms or through
a revision of those terms.
This Bank believes that some of these small firms
have been a constructive influence in the market, with a sense of responsibility to the market, and that they have striven to establish a representative business in United States Government securities.
Some of them conform
generally to one or more of the standards laid down by the committee, but
fail to measure up to all of them, and particularly to the requirement that
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Federal Reserve Bank of St. Louis
-9-
i
their business be national in scope, and to the requirement with respect
to the amount of capital employed. Although not unmindful of the difficulties which these firms have experienced in recent months (difficulties
•which are already tending to disappear), this Bank is of the opinion that,
in the broadest sense, neither the interest of the market nor the needs of
policy would be served by a relaxation of the qualifications established by
the Federal Open Larket Committee nor of their interpretation by this Bank.
The System through those dealers now qualified is dealing with firms which
handle upwards of 90 per cent of the daily volume of business transacted in
Government securities in the market and considers its contact with the market to be as broad and inclusive as the efficient and practical administration of the Account requires.
Of course, if any dealer not now qualified
should meet the Federal Open Market Committee's conditions, this Bank would
qualify it. But to qualify any large number of small dealers by relaxing
the conditions precedent to qualification or the interpretation of them
Y.'oulcl create a difficult administrative problem of determining qualification and maintaining performance, and eventually might well destroy the
principle governing present procedure.
This would carry in its train the
risk that the total volume of offerings to the System would be larger in
periods of support because a heterogeneous group of dealers would probably
include some who might actively solicit business against the System's supporting bids. Under the present set-up, if such soliciation of business
arose, it could readily be stopped in dealing with a compact group of
responsible dealers.
This Bank has also, at the request of the dealers, recently
studied in some detail, irith benefit of counsel at this Bank and at the
Board of Governors, a related suggestion that the System give tacit, if
not express consent, to the splitting of commissions paid by the System
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Federal Reserve Bank of St. Louis
-10to qualified dealers where the transaction in question has originated with
"unqualified firms."
This study indicates that the splitting of commis-
sions by dealers would not provide a feasible solution to the problem.
The more technical objections to this arrangement include the following:
1.
Under existing agreements the qualified dealer would be under
compulsion to see that a non-qualified dealer refrains from
any solicitation of offerings of United States Government securities and, in so doing, the former would in all cases find
it very difficult to prevent the disclosure of confidential
information with respect to his transactions with the Bank.
2.
A question is involved as to vfoether such an arrangement
vrould violate certain provisions of the Clayton Antitrust
Act as amended by the Robinson-Patman Act of 1936.
3»
It would appear that the splitting of fees would contravene the Nev York Stock Exchange rules with respect to transactions engaged in by dealers who are members of the Exchange.
Conclusions
The problems of the small dealers, outlined in this report, appear
to be less formidable and more temporary than some have suggested.
There is
no doubt that their operations have been circumscribed, in the recent past,
vtfien market quotations corresponded closely to the support levels.
Early
in February, however, two of the unqualified firms, which did not associate
themselves with the others in claiming discrimination by the System, reported that they were able to function at a reasonable profit during January
without a significant increase in their positions.
More recently, pressure
on the Treasury bond market has eased in response to a better demand and a
contracting supply, and a fair amount of two-way trading has taken place
yjlthout reference to the System Account.
The Federal. Reserve Bank of
New York has also, in its capacity as fiscal agent for the Treasury, purchased limited amounts of restricted bonds from unqualified dealers, from
time to time, on market orders for Treasury investment accounts*
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Federal Reserve Bank of St. Louis
-11After reviewing the tarns and conditions of qualification requirements established by the Federal 'Open Market Committee in 19l|lb
3n L
^ examin-
ing the market situation -which has recently developed, this Bank has no
changes to recommend either with respect to the substance of the conditions
or their interpretation.
From the standpoint of keeping the System's market
operations as nearly in line with its
credit policies as possible, a large
increase in the number of qualified dealers might easily weaken rather than
strengthen the System's position.
A relaxation of the interpretation of
the terms and conditions might easily result in such an increase and in an
administrative problem.
The principal danger in this regard would arise
from lowering the standards with respect to the requirements regarding
(l) ''volume and scope of business and the contacts which such business
provides", and ( 2 ) "capital at risk of business".
It would seem as impor-
tant now as it was in Hay 19UU that the line of demarcation betvreen qualified and unqualified firms be as clearly defined as possible, if the System's
practice is to be understood and defensible and if future requests for qualification are to be capable of determination.
It is the opinion of this Bank that the System's standards and requirements should be responsive to the needs of the national economy and of
credit policy and public debt management, not to the desire of all those v;ho
find it profitable to engage in the business of dealing in Government securities.
Att.
FEDEiiAL RESERVE BANK OF K YORK
April 15, 19U8.
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Federal Reserve Bank of St. Louis
@FedFRASER