To address the U.S. debt default crisis, Circle switches $8.7 billion short-term U.S. Treasury bonds to repurchase agreements.

The recent changes in USDC's reserve policy are summarized below, from Circle aiming to apply for Federal Reserve reverse repurchase agreements, the Federal Reserve raising standards for reverse repurchase transaction counterparties leading to Circle's disqualification, to Circle's response measures this time.

Circle Adjusts Reserves: $8.7 Billion in Bonds Converted to Tri-Party Repurchase Agreements

According to Circle's reserve data as of May 16th, several maturing short-term U.S. Treasury bonds have been converted to $8.7 billion in Tri-Party Repurchase Agreements, bringing the total reserve value to $29.512 billion.

Circle made this move to address potential risks of U.S. government debt default, with institutions involved in the Tri-Party Repurchase Agreements including:

• BNP Paribas: $2.073 billion

• Goldman Sachs: $2.004 billion

• Bank of America Securities: $1.95 billion

• Royal Bank of Canada: $1.1 billion

• Barclays: $1 billion

• Morgan Stanley: $500 million

• BNP Paribas Securities Services: $100 million

CoinDesk cited a statement from a Circle spokesperson, stating that while a U.S. debt default is unlikely, this adjustment provides additional protection for USDC reserves, and the collateral for these repurchase agreements does not include securities maturing within three days.

Counterparty Standards Raised, Circle Ineligible for Federal Reserve Reverse Repurchase Agreement

Circle had previously emphasized that the BlackRock-established, SEC-registered Circle Reserve Fund 2a-7 Government Money Market Fund aimed to apply for the Federal Reserve FOMC's RRP reverse repurchase agreement, ultimately keeping Circle's cash reserves within the FOMC.

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However, the Federal Reserve Bank of New York updated the standards for RRP counterparties on April 25, specifically stating that if a "'2a-7 fund is organized for the benefit of a single beneficial owner'," it would be deemed ineligible for reverse repurchase operations.

Circle Excluded: New York Fed Changes RRP Counterparty Policy, Circle's Reverse Repurchase Dreams Shattered

How Do Tri-Party Repurchase Agreements Work?

The structure of the Tri-Party repurchase market where Circle is involved consists of three types of participants:

• Securities dealers

• Cash investors

• Intermediary clearing banks between dealers and investors

The Tri-Party repurchase market allows participants to earn slight returns as securities dealers sell assets to investors and commit to repurchasing them within a specified time, with the intermediary role of clearing banks reducing administrative costs between the repurchase parties.

From Circle's reserve data, it is evident that their repurchase transactions are overnight trades, repriced daily, and can adjust fund conditions at any time. Overnight trades significantly reduce the risk of default. Currently, Circle is actively adjusting its reserve assets to diversify and mitigate potential U.S. debt risks.