Despite this long-standing perception among some market participants that primary dealer status represents an endorsement by the New York Fed of a financial institution’s creditworthiness or ability to provide efficient execution of large transactions, we have repeatedly stressed the importance of other market participants’ engaging in their own assessment of potential counterparties’ capabilities. Recent history provides several reminders that the primary dealer designation provides no guarantee against credit risk or other counterparty risks. While the New York Fed certainly performs its own due diligence, we do so in pursuit of our unique business objectives, which may differ from those of private agents. Market participants should therefore be  7  Since July 2013, the Desk has conducted pilot programs with seven smaller firms outside of the primary dealer system in order to explore how to conduct open market operations in Treasury and mortgage markets with firms that are considerably smaller than existing primary dealers. The Treasury Operations Counterparty (TOC) and Mortgage Operations Counterparty (MOC) pilot programs have provided valuable insight into the appropriate size and operational capacity of open market operation counterparties. BIS central bankers’ speeches  3  engaging in the appropriate level of due diligence required by their fiduciary responsibilities in the context of their specific business requirements. Such independent assessments are in our collective interest because they foster market discipline and a safer, more secure financial system.
Before I begin, I would note that the views I share with you this evening are mine and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.1 Principles and objectives Throughout the history of Federal Reserve operations in financial markets, our approach to engaging with counterparties has been designed to serve the effective implementation of monetary policy. The New York Fed, through its Open Market Desk (the Desk), is in the business of implementing policy as directed by the Federal Open Market Committee (FOMC, or the Committee), and the Desk has demonstrated a willingness to engage with a wide range of counterparties to achieve this objective under the guidance of the Committee. In addition to its role in the implementation of monetary policy, the New York Fed has a number of responsibilities and duties as the fiscal agent for the U.S. Treasury. We have therefore also used our counterparty relationships to assist the activities we undertake in support of the Treasury. Indeed, for decades, the primary dealers have played a critical role not only in open market operations, but also in the underwriting and distribution of newly issued Treasury securities. In addition to carrying out these domestic operations, we stand ready to conduct a number of foreign exchange operations.2 Foreign exchange counterparties are essential to the successful implementation of U.S. foreign exchange policy operations, which are conducted by the Desk but directed and funded generally equally by the Fed and the Treasury.