New York Fed’s Revised Guidelines for Reverse Repurchase Agreements Raise Concerns About Circle’s Participation

Under the RRP program, the Fed sells securities to authorized counterparties with the understanding that they will be bought back at maturity. However, the revised restrictions require that access to this system should be a natural extension of an already-existing business model rather than being set up specifically to access RRP operations. 

The New York Fed added that 2a-7 funds registered with the SEC, which the Fed deems to be structured for a sole beneficial owner or bear enough resemblance to such a fund, may be ineligible to participate in reverse repo operations.

The Circle Reserve Fund, a money market fund managed by BlackRock and exclusive to Circle, may be impacted by the Fed’s statement. Circle may no longer be able to invest in low-risk Treasury securities and earn interest on excess funds if the Reserve Fund is not approved for the Fed’s program. This could potentially affect the reliability of its stablecoin, USDC.

However, the New York Fed also clarified that funds that serve as cash management vehicles for various funds or investment entities in an investment fund complex would not necessarily be disqualified from the program.

These changes by the New York Fed come amid concerns about regulatory crackdowns on cryptocurrencies and stablecoins, which have caused USDC’s market value to decline by almost 50% in the last few months. Circle CEO Jeremy Allaire recently commented on the US regulatory environment, warning that the lack of regulatory clarity would drive cryptocurrency businesses overseas. 

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