Fed may block Circle from accessing liquidity

Circle, the issuer of USD Coin, may be deemed “ineligible” for access to the Federal Reserve’s money market due to new rules introduced by the New York Fed. 

The new guidelines are aimed at determining which parties are eligible to participate in the Fed’s reverse repurchase agreements, a process in which the Fed sells securities to counterparties that are deemed eligible with an agreement to repurchase them at the maturity date. 

The New York Federal Reserve has updated its policy on counterparties for market operations and the expectations and eligibility requirements for reverse repo counterparties. 

In order to ensure consistency with counterparty policies for other market operations, the eligibility criteria and expectations for reverse repo counterparties have been revised.

The main focus of these updates is to emphasize that accessing RRP operations should be a natural extension of a company’s business model, and not the primary purpose of a counterparty’s organization.

Gaining access to the reverse-purchase program

Since the counterparty should not be organized for the purpose of accessing RPP operations, Circle’s chances of gaining access to the Fed’s RRP, as the Circle Reserve Fund, is one such 2a-7 fund that could be “deemed ineligible” under the Fed’s statement.

In November 2022, Circle, the stablecoin issuer, announced a new measure to mitigate risks and ensure the redeemability of its coins for holders. This measure involved investing a portion of its funds into the Circle Reserve Fund, which is a money market fund managed by BlackRock, a leading investment management firm.

However, now, because the fund is exclusively available to Circle and does not meet the eligibility criteria for participating in such operations.

Continuous risk mitigation

To gain approval for the Fed’s program, Circle would have the opportunity to earn interest on its excess funds through investments in low-risk Treasury securities. 

This would enable the stablecoin issuer to not only earn interest, but also contribute to the stability of USD Coin (USDC). To be eligible, funds in this category must hold a minimum of 10% of their total assets in daily liquid assets and 30% in weekly liquid assets.

At the time, it was observed that although Circle had strengthened its relationship with BNY Mellon and entered into a new banking agreement with Cross River, the company still held 80% of its reserves and treasuries.

In light of the depegging of USDC after the collapse of Silicon Valley Bank on March 10, Circle has shifted its attention towards establishing additional banking partnerships globally.