MIP55c3-SP1: Adding Special Purpose Fund for Feasibility Study for Securitisation Framework in Singapore

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Preamble

MIP55c3-SP#: 1
Author(s): William Remor @williamr
Reviewers: Juan Guillen @juan, Wouter Kampmann @wouter  
Tags: rwa, rfc
Status:
Date Applied: 2021-09-24
Date Ratified: 
Purpose : Funding request
Amount Requested: DAI 45,154
Recipient Address: "0x44d2509074993b858c54B6d276ebD3816FC93A68"

Sentence Summary

The following document describes the purpose, the motivation, the scope and the budget required to complete a feasibility study to extend RWA investments to Singaporean-based issuers.

Paragraph Summary

This document aims to request funds from the Special Purpose Fund to conduct a feasibility study of Singaporean debt securities frameworks. This will enable MakerDAO to invest confidently in domiciled Singaporean issuances as part of its increased allocation of DAI to RWA exposures.

While the scope of this study focuses on a specific issuer with good performance record and capital scaling capacity, the end goal is to understand the conditions that will make possible to set up a base structuring framework for various asset-backed security (ABS) issuances for Singaporean-domiciled entities.

Motivation

As part of the expansion and diversification of MakerDAO in RWA debt investments, it is crucial that the protocol extends its portfolio exposure to key financial centres. Singapore is a cornerstone financial hub for the Asia-Pacific and is expected to lead the credit expansion in the fastest growing region of the globe this decade. This strategic position requires MakerDAO to work closely with well regulated originators and issuers in Singapore. These entities are increasingly encouraged by regulators to on-shore/domicile their security issuances (e.g. SPV, Trusts etc) within Singapore. Singapore is also a critical hub in Asia for crypto as the regulator authorities are actively setting up frameworks for financial institutions to operate safely with crypto-assets in a clear regulatory environment.

Based on our preliminary analysis, Singapore has significant fintech and lending opportunities for a dedicated RWA Core Unit to focus on asset-backed debt securities with local issuers.

We also think this feasibility study can enable further decentralisation of the RWA vetting process within Maker by spinning up a narrowly focused team of experienced risk professionals. Last, the work with well regulated issuers from Singapore is expected to bring significant yield to the protocol while combining it with a high credit quality. We expect the outcome of the feasibility study to support this thesis.

Special Purpose Fund Scope & Work Credentials

Use case overview: Tier 1 Singaporean Issuer

The following section describes our prospect issuer which will be the basis for the study of a securitisation structure within Singapore.

The issuer is a regulated and reputable P2P SME business lending platform, with headquarters in Singapore and lending activities across ASEAN: Singapore, Indonesia, Malaysia and Thailand. Its P2P platform has originated more than 2.5 billion dollars and ~5 million loans across its SME products: factoring, trade finance, term lending, revolving line of credit, property-backed business lending.

  1. Based on our research, the issuer holds a CMS licence for dealing in securities, and accordingly an exempt financial adviser under Section 23 of the Financial Advisers Act. What is stated about their business in their website is that:

    i. The issuer is a Capital Markets Services Licence (“CMSL”) holder for the regulated activity of dealing in securities under the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”). The issuer is regulated by the Monetary Authority of Singapore (“MAS”) in respect of this regulated activity only;

    ii. The issuer, as a CMSL holder, is an exempt financial adviser pursuant to Section 23 of the Financial Advisers Act (Cap. 110) of Singapore (the “FAA”);

    iii. The issuer does not and will not:

    • carry on a deposit-taking business nor take any deposit;
    • take any equity interest in any Issuer; or
    • apart from dealing in securities, engage in activities regulated under the SFA.

    iv. The issuer’ role in providing the Services is merely administrative and mechanical in nature in arranging for the Issuer to obtain financing (save as expressly contemplated herein) and as such the issuer is not regulated by laws regulating the business of moneylending, financing business, the taking of deposits in the course of carrying on a deposit-taking business, or fund management (including but not limited to the Moneylenders Act (Cap. 188) of Singapore; Finance Companies Act (Cap. 108) of Singapore; Banking Act (Cap. 19) of Singapore) or the SFA.

  2. The intention is for issuers and asset originators such as the issuer to issue “notes” (i.e. debt bonds) or tokens securitised or backed by assets (e.g. loans). In this case, the intent of the feasibility study is to examine security/collateral over assets such as trade finance/ supply chain finance loans. Examples include invoice factoring, revolving credit lines, account receivables finance and inventory finance. The study will look into possible securitisation frameworks using these parameters. The client, i.e. MakerDao community, will then evaluate whether to invest or not by purchasing these securitised notes or tokens backing the assets.

  3. The intention is that the decisions on the debt and changing of features, security and decisions etc will be decided by a decentralised organisation consisting of MakerDao token holders.

Scope of study

  1. The scope of the study will also look to answer the following questions:

    i. Options for how to securitise these assets through a legal framework for issuers that are domiciled in Singapore.

    ii. Take into account and examine the decentralised governance structure within MakerDao where MKR token holders are responsible for voting on material actions that happen to the assets that are placed in any securitisation structure (e.g. SPV, trust, etc.)

    iii. Any conditions (legal, regulatory, taxation, auditing, other) that need to be met to achieve the outcome we are looking for i.e. a holistic structuring framework

    iv. Estimated average timelines to meet these conditions

    v. Any requirements and responsibilities that counterparties involved (e.g. issuer, servicer, Makerdao, broker-dealer, collateral agent etc) must comply under the legal/regulatory framework of Singaporean issuances

    vi. Costs (associated with structuring, contractual work, tax implications for both the issuer and MakerDAO (eg. withholding tax), auditing cost, and any other cost associated with the framework setup)

    vii. Any other consideration.

  2. Our thoughts are to structure the feasibility study as follows:

    i. explore the options for securitisation of the above trade finance/supply chain finance options,
    ii. the possible structure and legal documents,
    iii. decentralised governance structure and the relationship with the securitisation framework; and
    iv. feasibility of the structure including pros and cons.
    v. requirements to ensure a “true” bankruptcy-remoteness (“true sale”) of the assets in the structure and ther required 3rd parties involved (e.g. back-up servicer, collateral agent, auditor etc)

This is a preliminary structure, and could be adjusted as we proceed with the discussions with the law firm charged with leading the study.

Post study implementation

This feasibility study is the initial phase of a two-step process to validate the business case (i.e. engagement with Singaporean-based issuers) and to provide options on the most appropriate structure as well as related requirements. Following the study, there will be an implementation phase of the actual structure, which will follow the standard governance process (e.g. MIP6, MIP21, polls etc).

In the interest of decentralisation of the process, the follow-up working group intends to maintain its engagements with existing counterparties at implementation phase. This will be the result of a collaboration with the growth CU, the issuer, an “arranger” (e.g. RWACo) as well as other involved counterparties (e.g. legal, servicer, auditing etc). This decentralisation of the implementation process will also enable a reduced cost of structuring as it is the intention that the other counterparties bear on most of the securitisation implementation costs.

After the feasibility study has been completed additional work is required to set up the suggested framework. This will be covered by a separate request.

It is the intention that the outcome of this framework will be used as a basis for RWA working groups to expand on ABS markets in Singapore beyond trade finance/SCF (e.g. receivables, consumer/business credit).

Funding Breakdown

Before submitting this request for funds we have obtained quotes from three very reputable law firms, based in Singapore with global teams covering the specialised areas required for a complete study (e.g. legal, regulatory, taxation, securitisation, DeFi, bankruptcies). The selected law firm has the most qualified team of professionals for the task. The budget reflects their quote.

  1. Law firm fees for preparing this would be based on the time spent by its fee earners, based on a goodwill and a preferential rate to Maker. Its estimated the feasibility study can be:

    i. Finalised within three (3) drafts with the third being the finalised document; and
    ii. a call or discussion after each draft for discussion at up to 1.5hours for each call

Fees were quoted in the USD36,000 – USD42,000 (excluding disbursement and any applicable taxes).

This request is for the following amount:

  • USD 42,000 the upper limit of the range quoted
  • Disbursements: estimated to be USD200
  • Tax: 7% GST of quote, including disbursements, estimated to be USD 2,954.
  • Total request: USD 45,154

The target is to have the first draft done within 10 business days from confirmation of engagement and subject to onboarding/KYC clearance.

Special Purpose Fund Details

Official Contact or Group Name: William Remor (@williamr)
Contact Email/Handle: [email protected]
Date Added: TBD
Total Amount: DAI 45,154
Wallet Address: "0x44d2509074993b858c54B6d276ebD3816FC93A68"
Comptroller signers: TBD
13 Likes

Very exciting stuff

4 Likes

Good stuff William, just a few questions from me.

Will the study deal directly with funding multiple tranches of ABS within multiple jurisdictions directly and will the study cover a structure related to one/two major outlets that Maker can manage more conveniently? (managing 1,000 SPVs, versus 2). BTW, I think in Singapore they use like “buy-back options” structures for ABS deals–is that still the case? (similar to swaps)

Will the study also look at the emergence of the MBS market & growth potential in said region? I recalled many many years ago Singapore was not too keen on the usage of MBS. (that has probably changed)

Also, I imagined you have spoken with law firms that are familiar with DAO structures. So, I was wondering if the law firms you are thinking of hiring–will they also provide a political risk assessment?

TY in advanced!

1 Like

@ElProgreso These are great questions as they assist clarifying what is the scope. I’ll clarify them with the caveat that there will be a couple of refining sessions as we progress the study to delivery.

There are two points here. The initial focus is on relatively simple ABS structures, whether that be composed of a simple senior and a junior class note or a senior/mezz/junior will be contemplated in so far as they change any requirements or conditions that need to be fulfilled by any counterparty involved, regulatory or otherwise. If the multi-tranche is purely a pricing and protection mechanic for Maker then this can be more flexible and be determined/negotiated in the interaction between the counterparties (issuer, arranger, maker and other investors). In terms of jurisdictions, the focus is on issuances from Singapore and Singaporean originators itself. Even tough the financial role of Singapore is important for surrounding ASEAN jurisdictions, the issuer/issuances are regulated by laws of Singapore.

The best practice is that SPVs be single-narrowly focused by asset pool with a coherent credit risk and credit quality. This gives investors like maker the clarity they are investing in a sort of “single purpose/asset mini-bank” with a clear defined risk. With regards to the management, there are at least two considerations: size of individual SPV or trust and community/MKR tokenholder approach to discussions like the RWA foundations. If the focus in Singapore were for e.g. a smaller number of issuances but of higher credit quality, scalability (> 100M) and diversification (e.g. thousands of loans in a pool), then maybe there aren’t thousands of small SPVs to manage. The study will contemplate both possibilities though, so that there is a path to either of them and the related requirements depending on which direction the implementation goes.

These options are a quite unique feature of real estate backed securitisation deals in Singapore. This is mainly visible in project financing and commercial building bond securitisations. The initial scope is focused outside the mortgage market.

Given the short-term debt bias of Maker, the scope is focused on other types of ABS with shorter term maturities than MBS/CMBS. As the community matures the conversations, the solutions and the risk appetite for longer term securities, we can broaden the scope including real estate at a later stage.

Lawfirms with understanding of DAOs and particularly the understanding of the role of governance voting in any material actions to the assets was a key part of the shortlisting process.

Political risk assessment has not been discussed. I’ll raise that as a consideration point, both an internal (Singapore) and geopolitical one (Singapore as in South East Asia and its importance to China-US relations). Most importantly, how can that possibly affect the collateral or the structure.

1 Like

Regarding this proposal, it is not clear if this is about creating a lender-side structure (like the Delaware Trust, the Cayman or Jersey Foundation, i.e. a real-world conduit for MakerDAO) or the borrower-side securitization/arranger-side (like what Centrifuge is doing or the note structuring process that 6S and SolarX are doing)? It seems to be the latter, which is quite unexpected from a lender perspective. Maybe some color on the reasoning and motivations behind that would be useful.

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Note the work is intentionally divided in two phases: 1. feasibility 2. implementation. It is not by chance. For a framework to operate holistically it is natural the feasibility aims to take into account both lender-side and borrower-side requirements upfront, regulatory and otherwise. So that at phase 2. implementation, Maker can benchmark what is “good” securitisation (Singapore-specific) and whether borrower-side requirements are met against what was recommended. It is the method proposed intentionally so.

So firstly I do like the regulators flexibility in Singapore. I personally have no doubt it is probably the best place to establish a legal structure and operation for pushing out into Asia - great infrastructure for financial services overall I believe. Just a few things to perhaps consider:

  1. I have not found lawyers to be very good at giving ‘general advice’ - they are a lot better at solving a specific situation (i.e. I want to securitize these assets of lender X and I want MakerDAO to fund in this way etc etc). Perhaps focus squarely on the use case and see what general concepts might be derived from that?

  2. A lot of the issues in all this relates not so much to legal structure (to be fair, Greg/Sebastian and others have explored the pros’ and con’s of so many legal structures now that there are few surprises left to uncover on a general basis - it somewhat now is about choosing which flavour might suit the situation best - including issue of tax leakage etc.) but practical application - for instance - can the legal structure get a bank account from a bank that the lenders can accept? Can we satisfy their needs for KYC/AML. If we need a reputable third-party trustee/board/whatnot independent governance, then are there anyone who will work with us? Can you find custodians/etc? I hope you get a chance to get into that part also in your study.

  3. Lastly - I believe MakerDAO have intrinsic advantages (opex, funding cost, funding source, funding terms, governance, speed, etc). I truly think it would be worthwhile thinking about how you can project these advantages into this real world application of accessing the ABS market. I am sure you will find some angle (beyond cheaper funding preferably…). I hope you get a chance to review that also - maybe at least a little bit. One always prefer entering a market where one has an unfair and growing advantage :slight_smile:

Looking forward to see where you get to with the study - glad to see somebody working with Singapore - I am sure we will see more of Singapore as RWA grows in Asia.

Thx Allan

6 Likes

Thanks for the recommendations, Allan. This is a very constructive input. I’ll take these points into account as the workshop sessions evolve. With regards to point 1, that is the intention indeed, as provided under use case overview. Focus on a narrow case, and possibly extrapolate from there.

3 Likes

I just come across this 2021 A Global Guide to Legal Issues in Securitisation by global law firm Baker McKenzie. Thought I shared with the community. There are 33 jurisdictions covered in this guide. No Singapore or US, but plenty of ASEAN, Asian, LATAM and European jurisdictions here.

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