L. F. Rothschild Ends Role as Primary Dealer
L.F. Rothschild & Co. Inc. said Tuesday that it has withdrawn as a primary dealer, making it the second institution in less than a week to defect from the exclusive club of bond dealers that trade directly with the government.
Rothschild, a subsidiary of L.F. Rothschild Holdings Inc., said its departure, which will leave 44 primary dealers to trade with the Federal Reserve, was effective immediately.
Rothschild also said it will discontinue its U.S. government securities sales and trading activities except for trading in its own account.
Rothschild said that, while its capital exceeded the Federal Reserve’s new requirements for primary dealers, the return on capital devoted to its government securities operations was insufficient to warrant continuation of the business.
A rumor that Rothschild would leave the primary dealer business circulated widely Friday when County Natwest Government Securities Inc., a subsidiary of Britain’s National Westminster Bank PLC, said it was quitting the overcrowded and often unprofitable business. County Natwest had been a primary dealer for less than four months when it made its surprise announcement.
“It is pretty obvious right now that the valuation for government dealerships is dropping through the floor. Given the pressure of new volume and capital requirements (by the Fed), a lot of firms are probably debating whether to stay in the business,” a dealer said.
Primary dealerships are special rights granted by the Federal Reserve to deal directly with the government when it issues debt securities. The once-prestigious role as the government-sanctioned bond dealer has been losing its appeal as intense competition cuts profit margins.
The Fed’s maneuvering of government securities in the open market is closely watched for clues to monetary policy changes.
Primary dealers’ trading screens are believed to offer the firms a prized seat in determining market trends.
But several managers of existing primary dealerships complain that as the number of dealers expanded, from 36 at the end of 1985, the crowded conditions have made profitability more elusive.
Dealers said at least half of the primary dealers were not profitable in 1988. Some said only seven firms made profits.
Jorge Gamarci, chairman and chief executive of Lloyds Government Securities Corp., a unit of Lloyds Bank PLC, said the difficulty of meeting the Fed’s new volume requirements is forcing firms out.
On Nov. 17, the Fed doubled minimum capital requirements of dealers to $50 million and said the dollar value of dealers’ transactions in Treasury and Federal agency issues should average 1% of primary dealer volume.
