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"
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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