New York Fed changes RRP counterparty policy, Circle's reverse repo dreams shattered

The Federal Reserve Bank of New York in the United States issued a statement yesterday regarding the market operations counterparties and reverse repurchase agreement counterparties policy, updating the eligibility criteria for reverse repurchase (RRP) transaction counterparties, resulting in stablecoin issuer Circle, which had previously sought to enter the Federal Reserve's RRP agreements through the money market funds, being confirmed to be out of the running.

What is a Reverse Repurchase Agreement?

The Federal Open Market Committee (FOMC) uses reverse repurchase agreements (RRP) as a tool for open market operations to control short-term interest rates in the market. The way it works is that the Federal Reserve provides bonds to qualified trading partners and later repurchases those bonds.

On the other hand, these qualified trading partners can place their idle funds in tools of the FOMC and earn market rates. The current overnight rate is 4.8%. In the current volatile financial market, many financial institutions choose this method for fund management as it allows them to earn high interest without the need to lend money or invest in other risky assets.

Qualifications of Reverse Repurchase Counterparties

According to the website of the Federal Reserve Bank of New York, there are three qualifications for reverse repurchase counterparties:

• Total assets greater than or equal to $300 billion, or reserve balances greater than or equal to $100 billion from the previous quarter for state or federally chartered banks or savings associations
• Government-sponsored enterprises
• 2a-7 funds registered with the SEC

The statement specifically mentions that 2a-7 funds organized for single beneficial owners, or those showing sufficient similarity to such organizations, are often considered ineligible for reverse repurchase operations.

Circle's Dream of Reverse Repurchase Shattered

Since the end of last year, Circle has been collaborating with asset management group BlackRock Advisors to transfer the reserves of its USDC stablecoin to the Circle Reserve Fund 2a-7 Government Money Market Fund, a dedicated fund established by BlackRock and registered with the U.S. Securities and Exchange Commission (SEC). This fund, exclusive to Circle, includes cash and short-term U.S. Treasury securities in its portfolio, with custody provided by The Bank of New York Mellon. Chief Financial Officer Jeremy Fox-Geen had expressed the ultimate goal of applying for the fund to enter the FOMC's RRP reverse repurchase agreement.

However, according to the recent announcement from the Federal Reserve Bank of New York, the dream of Circle Reserve Fund entering into the reverse repurchase agreement has been completely shattered. While not explicitly named, the exclusion of single beneficial owners qualification means that Circle has lost the opportunity to apply, and its future operations will mainly focus on purchasing short-term government bonds.

For more information on Circle's monetary fund, see: Circle Partners with BlackRock in Aim to Enter Reverse Repurchase Agreement with USDC Reserves