The New York Fed issued new rules for counterparties wishing to use its money market balancer, creating uncertainty about stablecoin issuer Circle's intentions to use the Fed's system.
In an April 25 statement, the New York Fed announced adjustments to its guidelines for determining which parties are eligible to participate in its reverse repurchase agreements (RRPs). The updated guidance could hammer Circle's access to the Fed's repurchase verse repurchase program the process by which the Fed sells securities to eligible counterparties and agrees to buy them back at maturity.
According to the New York Fed, access to such a system "should be a natural extension of existing business models, and counterparties should not be organized with the intent of accessing RPP operations."
“An SEC-registered 2a-7 fund that is organized for a single beneficial owner, or that exhibits sufficient similarity to a fund so organized, in the sole judgment of the New York Fed, will generally be deemed ineligible to conduct reverse repo operations. " 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 therefore may be "deemed ineligible" according to the Fed's statement.
The regulations governing 2a-7 government money market funds are designed to ensure that potential redemptions from investors can be met by these funds in a timely manner.
Funds in 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. Approval of the Fed's plan would allow Circle to earn interest on excess funds by investing in low -risk Treasury bonds, allowing stablecoin issuers to earn interest and help maintain the stability of its stablecoin, USD Coin.
Circle's vice president of Asia Pacific, Raagulan Pathy, told Cointelegraph in March that Circle “ultimately wants to park” all of its cash at the Fed and “use the payments to the Fed because it frees us from our TradFi reliance on partners.” It was pointed out at the time that Circle held 80% of its reserves and Treasury bills, even as it expanded its ties with BNY Mellon and formed a new banking partnership with Cross River.
Since depegging the USDC following the collapse of Silicon Valley Bank on March 10, Circle has shifted its focus to “building more banking partnerships around the world,” according to Pathy. It wasn't until November that Circle announced that it had begun in vesting some of its funds in the Circle Reserve Fund as a measure to mitigate risk and maintain the redeemability of its tokens to holders.
