NY Fed New Rules Cast Uncertainty on Circle’s Access to Reverse-Repurchase Program

The New York Federal Reserve has updated its guidelines for counterparties looking to participate in its reverse repurchase agreements (RRP), casting uncertainty over Circle’s intentions to access the Fed’s system. The changes to the guidelines could potentially hinder Circle’s chances of gaining access to the Fed’s reverse-repurchase program, where the Fed sells securities to eligible counterparties with an agreement to repurchase them at the maturity date. The Circle Reserve Fund, a money market fund managed by investment management firm BlackRock, is one such 2a-7 fund that is only available to Circle and could be deemed ineligible under the Fed’s updated guidelines.

According to the New York Fed, accessing such a system “should be a natural extension of an existing business model, and the counterparty should not be organized for the purpose of accessing RPP operations.” In other words, the Fed’s program is not intended for entities that are solely organized to access RRP operations. The regulations governing 2a-7 government money market funds are aimed at ensuring that these funds are able to meet potential redemptions by investors in a timely manner. Funds under this category must hold at least 10% of their total assets in daily liquid assets and at least 30% of their total assets in weekly liquid assets.

If approved, Circle would be able to earn interest on excess funds by investing in low-risk Treasury securities, allowing the stablecoin issuer to earn interest and help maintain the stability of its stablecoin, USD Coin (USDC). However, Circle’s access to the Fed’s reverse-repurchase program remains uncertain under the updated guidelines.

It is worth noting that Circle has been expanding its banking partnerships on a global basis since the depeg of USDC following the collapse of Silicon Valley Bank on March 10. The company has also turned its focus to having more banking partnerships to mitigate risks and uphold the redeemability of its coins for holders. Circle announced in November that it had begun investing part of its funds into the Circle Reserve Fund as a measure to mitigate risks and uphold the redeemability of its coins for holders.

Circle’s access to the Fed’s reverse-repurchase program would have allowed the company to further diversify its reserves and treasuries. As of now, Circle holds 80% of its reserves and treasuries. Despite Circle’s expanded ties with BNY Mellon and its new banking partnership with Cross River, the updated guidelines set by the NY Fed have created uncertainty over Circle’s access to the Fed’s reverse-repurchase program. The stablecoin issuer will need to explore other options to ensure the stability and growth of its stablecoin.