Dealer Loans and Repurchase Agreements

The money market depends heavily upon the buying and selling activities of securities dealers to move funds from cash-rich units to those with cash shortages. About three dozen primary dealers in United States government securities trade today in both new and previously issued Treasury bills, bonds, and notes. Many of these dealers also buy and sell other money market instruments, such as commercial paper, CDs, and bankers‘acceptances. They are the principal points of contact with the money market for thousands of individual and institutional investors and are essential to the efficient functioning of that market.
While the dealers supply a huge volume of securities daily to the financial market, they also depend heavily upon the money market for borrowed funds. Most dealer houses invest little of their own equity in the business. The bulk of dealer operating capital is obtained through borrowings from commercial banks, nonfinancial corporations, and other institutions. A major dealer firm carries hundreds of million of dollars in securities in its trading portfolio, with 90 percent or more of that portfolio supported by short-term loans, some carrying only 24-hour maturities.
the two most heavily used sources of dealer funds are demand loans from the nation‘s largest banks and repurchase agreements (RPs) with banks and other lenders. Every day, the major New York banks post rates at which they are willing to make short-term loans to dealers. Generally, one rate is quoted on new loans and a second (lower) rate is posted for renewals of existing loans. A demand loan may be called in at any time if the banks need cash in a hurry. Such loans are virtually riskless, however, since they usually are collateralized by U.S. government securities, which may be transferred temporarily to the lending bank or its agent