Dear MakerDAO Community,
We submit to you, on behalf of European investment firm Societe Generale-Forge, this MIP6 application for discussion and approval of Security Tokens refinancing. This first experiment at the crossroads between regulated and open source initiatives, as described below, is intended to refinance a Covered Bond Token that has been issued last year on the Ethereum public blockchain. We let you take into consideration all the details, and we look forward to receiving your feedback. Thank you.
1. Who is the interested party for this collateral application?
Societe Generale – Forge (“SG – Forge”) is a regulated subsidiary of Societe Generale (“SG”) licensed as an investment firm under MiFID 2 regulation, and dedicated to digital assets and blockchain-based projects.
SG is one of the leading European financial services groups with over 138,000 members of staff in 62 countries and supports on a daily basis 29 million individual clients, businesses and institutional investors around the world by offering a wide range of advisory services and tailored financial solutions.
This refinancing transaction experimentation is in line with the innovative process and solutions developed by SG-Forge. This experimentation combines traditional capital market activities with the decentralized finance (“DeFi”) emerging and growing ecosystem.
For the purpose of this MIP6 application, we define and assume following elements that will be used along the application:
The “OFH Tokens”: the OFH Tokens are characterized as covered bonds under French Law backed by home loans and benefiting from a statutory privilege, issued by Societe Generale SFH (SG SFH) a specialized credit institution with the status of Société de Financement de l’Habitat delivered by the Authorité de Contrôle Prudentiel (as further described below) in the form of security tokens in the Ethereum public blockchain.
The OFH Tokens are not admitted to trading on a trading venue, so that they can only be traded over the counter (“OTC”).
The main characteristics of the OFH Tokens are the followings:
- ISIN: FR0013510518;
- Nominal Amount: 40MEUR;
- Interests: Fixed rate at 0%;
- Final Redemption Amount: 100% of the Nominal Amount;
- Issue Date: 14/05/2020;
- Maturity Date: 14/05/2025;
- Rating: aaa by Moody’s and AAA by Fitch;
- Form of the OFH Tokens: dematerialized Notes in fully registered form, registered in Ethereum public blockchain;
- Governing Law: French Law.
The DAIs have been characterized as digital assets as defined under French Law.
For comprehensive purpose, terms in square brackets are still to be determined or to be discussed.
2. Provide a brief history of the project and a brief high-level overview of the project, with a focus on the applying collateral token
SG-Forge aims to provide issuers and qualified investors, with end-to-end services to issue, manage and trade digital-native financial instruments registered on the blockchain (“Security Tokens”). SG-Forge’s service offering is based on the open source framework CAST (Compliant Architecture for Security Tokens). Further information on CAST can be found at www.cast-framework.com.
CAST is a new market standard and open-source (available under Apache 2.0 license) set of components, designed for the issuance, custody, and trades of Security Tokens. The CAST Framework has been approved and trialed in significant issuances of Security Tokens realized in 2019 with the first worldwide security tokens issuance of a native security on the Ethereum public blockchain (SG SFH €100,000,000 issuance of OFH Tokens), 2020 with the first security tokens issuance settled in Central Bank Digital Currencies (CBDCs) in partnership with Banque de France (SG SFH €40,000,000 issuance of OFH Tokens), and 2021 the issuance of bond tokens by the European Investment Bank on the Ethereum public blockchain settled in CBDCs issued by Banque de France (EIB €100,000,000 issuance of bond tokens), as well as the first worldwide issuance of a structured product in the form of native Security Tokens on Tezos public blockchain (Societe Generale €5,000,000 issuance of Notes tokens).
Through this first pilot use case SG-Forge aims to :
Refinance the OFH Tokens held by Societe Generale.
Set-up the legal structure of the refinancing and apply the appropriate accounting and operational principles;
Integrate with one of the largest DeFi protocols;
Help to shape and promote an experiment under the French legal framework:
- security tokens;
- the pledge on security tokens in a blockchain;
- the use of a security agent;
Enhance a profitable service and foster liquidity for digital bonds.
Also, this transaction allows MakerDAO to have a different type of collateral assets from the cryptocurrencies. While the stability fees will be close to the interest rate paid under classical covered bonds, it provides access to a non-volatile type of collateral assets.
General description of the refinancing structure of the OFH Tokens:
- SG Forge would grant a USD loan to SG (the “USD Loan”);
- As security for the performance and discharge of its obligations under the USD Loan, SG would transfer by way of security to SG Forge the ownership of the OFH Tokens with a right of reuse;
- SG-Forge would borrow DAI from the Maker Representative (the “DAI Loan”). For the purpose of the DAI Loan, SG-Forge would pledge the OFH Tokens to the benefit of the Maker Representative and located in a Vault (the “Pledge”). The Pledge does not imply a transfer of ownership of the OFH Tokens to MakerDAO, unless the Pledge is enforced;
- SG-Forge would enter into an agreement with an exchange agent (the “Exchange Agent”), whereby it would deliver the DAI it received pursuant to the DAI Loan against US dollars. The US dollars obtained pursuant to the Exchange Agreement would allow SG-Forge to make the USD Loan; and
- Upon the unwinding of the transaction, the following would simultaneously occur: (i) the USD Loan would be redeemed by SG to SG-Forge, (ii) SG-Forge would exchange with the Exchange Agent the U.S. dollars received from SG against DAI, (iii) the DAI obtained by SG Forge would be redeemed under the DAI Loan, (iv) the Pledge of the OFH Tokens would be released, and (v) the OFH Tokens would be transferred back by SG-Forge to SG.
DAI loan features:
- Up to 20MDAI ;
- Maturity: 6 to 9 months.
Description of the Parties:
The Registrar: Societe Generale – Forge, an investment firm incorporated under French Law, having its registered office at 17 Cours Valmy, 92800 Puteaux, France, registered with Nanterre Commercial and Company Registry under number 882 696 628.
The Registrar maintains the register of the security tokens issued by Societe Generale SFH and held by Societe Generale. The Registrar will record the transfer and the pledge of the OFH Tokens as required by the structure.
Societe Generale: a credit institution (établissement de credit) incorporated under the laws of France, having its registered office at 29, boulevard Haussmann, 75009 Paris, France, registered with Paris Commercial and Companies Registry under number 552 120 222.
Societe Generale is currently holding the OFH Tokens on Ethereum.
MakerDAO (« The Community »). The Community is composed by MKR Token holders. The Community is then a collection of unknown people or legal entities.
Maker Representative: The Community is not a legal entity, so that the Community cannot execute a legal document by itself. The Community will then need to appoint a natural person or a legal entity to represent and act for the account of The Community. In that respect, The Community will process to a vote to appoint a Maker Representative that will execute legal documentation. The Maker Representative serve as administrative role (interest payment/reception, bills, etc.). To clearly define the Maker Representative role, The Community should assign the Maker Representative obligations and duties and appoint it by voting.
Security Agent: refers to DIIS Group (https://www.diisgroup.com/) who will act as Maker Representative and as Security Agent of the Community according to article 2488-6 and seq of the French Code civil in order to take, create, manage, release and enforce the pledge for the account of the Community.
Exchange Agent: Societe Generale – Forge will exchange DAI with USD with an exchange agent that will be revealed in due time.
4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.
Smart contract address: 0x9915CeD2820082a25A8992752AA43bCB0E1d1097
5. Link any available audits of the project. Both procedural and smart contract focused audits.
The Smart contract has been audited by a leading audit firm and will be provided to MakerDAO Core Units.
6. Link to any active communities relating to your project.
To facilitate the gradual adoption of the CAST Framework and common market practices by various stakeholders and foster their participation and contributions for various use cases, a Governance Body for the CAST Framework will be set up. The “CAST Governance Body” will bring together the main stakeholders interested in digital asset and Security Token projects (banks, start-ups, technology service providers, financial institutions, etc.) to govern the CAST Framework and amend it from time to time if necessary. The philosophy of the CAST Governance Body will be based on the following pillars: the development of new business models based on digital technology and open-source digital ecosystems, breakthrough innovations, and the technological modernization of market participants and of financial services provided to clients.
A dedicated forum to discuss the CAST Framework will soon be added on CAST website: https://www.cast-framework.com/
7. How is the applying collateral type currently used?
The OFH Token, that will serve as collateral in this refinancing use case, is currently held by Societe Generale.
8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?
As a reminder, SG-Forge would borrow DAI from MakerDAO through the Maker Representative. As a condition precedent to the DAI Loan and as security for the performance and discharge of its obligation of restitution of the DAI, SG-Forge would pledge to the Security Agent, acting in its own name but on behalf of MakerDAO, the OFH Tokens, so that the market value of the OFH Tokens on that date shall correspond at least to the value of the DAI Loan with an overcollateralization percentage. The Security Agent will be in charge of the completion of any pledge formalities that may be required.
The rights and obligations of the parties under the Pledge shall remain in full force and effect until the DAI have been fully redelivered by SG Forge to The Community (through the Maker Representative) under the DAI Loan. In that case, the Security Agent shall execute and deliver all such instruments and documents and take all such action, as may be reasonably necessary or appropriate for the purpose of granting a definitive release in respect of the Pledge.
DIIS Group (https://www.diisgroup.com/) will act as Security Agent (under French jurisdiction) and the Maker Representative for the structure. The appointment of DIIS Group by the Community needs to be passed through a vote.
Collateral Test and Liquidation Procedure:
On each Business Day, a collateral agent performs a collateral test (the “Collateral Test”) in order to verify that the market value of the OFH Tokens is at least equal to the collateral percentage that has been fixed.
In the event that the Collateral Test is not satisfied on any calculation date (a “Collateral Event”), the collateral agent shall inform SG and the Security Agent of the occurrence of such Collateral Event through a collateral event notice (“Collateral Event Notice”).
From the date on which the Collateral Event Notice has been received, Societe Generale shall on following the [five (5)] Business Days either:
- Send additional Collateral Assets on the Vault in order for the Collateral Assets value to comply with the Collateral Test;
- Transfer an amount of USD that reduces the loan of DAIs in order to perform the Collateral Test.
In the event SG does not, within the [five (5)] Business Days period after the delivery of the Collateral Event Notice, such event shall constitute a liquidation event (a “Liquidation Event”), and the collateral agent shall inform SG and the Security Agent of the occurrence of such Liquidation Event through a liquidation event notice (“Liquidation Event Notice”).
The delivery of a Liquidation Event Notice shall trigger:
- the automatic termination of the DAI Loan which will become immediately due and payable; and
- the automatic termination of the USD Loan which will become immediately due and payable.
Appropriation or sale of the OFH Tokens following a Liquidation Event Notice
Upon receipt of a Liquidation Event Notice, the Security Agent shall enforce the Pledge and hold the OFH Tokens for the account of the Community until the maturity date and their final redemption, or will proceed with the sale of the OFH Tokens to the extent there is a sufficiently liquid market.
If the redemption amount paid by SG SFH to the Security Agent exceeds the amount due under the DAI Loan plus the unwinding costs, the Security Agent will transfer the exceeding amount to SG.
If the redemption amount paid by SG SFH to the Security Agent is less than the amount due under the DAI Loan plus the unwinding costs, the shortfall will be deemed to be at zero and will not be due to the Security Agent.
9. Where does exchange for the asset occur?
The exchange will occur as sequenced in the above diagram.
10. (Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.
This refinancing transaction experimentation has been approved by the supervision committee of SG Forge with the relevant validations from Business, Compliance, Legal and Risks departments of Societe Generale.
We benefit from a legal structure memorandum from Gide Loyrette Nouel (one of the major French law firm) that cannot be shared for confidentiality purposes.
In the same way, the OFH Tokens that will be used as collateral has been characterized as debt obligations, qualified as covered bonds, issued and governed by French law. They are fungible, negotiable and they provide the same right per securities to the holder and they represent a claim against the issuer.
11. (Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.
The OFH tokens (Obligations de Financement de l’Habitat) are issued by Societe Generale Société de Financement de l’Habitat (SG SFH), a specialised credit instritution duly licensed by the Autorité de Contrôle Prudentiel.
The OFH tokens constitute debt securities (obligations) in accordance with Article L.211-3 of the French Monetary and Financial Code and, constitute are direct, unconditional, unsubordinated and privileged obligations of the Issuer in accordance with Article L.513-11 of the French Monetary and Financial Code. They are fungible, negotiable and they represent, they provide the same right per securities to the holder and they represent a claim against the issuer.
The OFH Tokens are issued and registered in a distributed ledger technology in accordance with Article L.211-3 et seq. and R.211-11 et seq. of the French Monetary and Financial Code.
The OFH Tokens are issued under the Euro Medium Term Note Programme described in the prospectus approved by the Autorité des Marchés Financiers and downloadable through https://prospectus.socgen.com/ with criteria (i) Issuer: SOCIETE GENERALE SFH, (ii) Program: DEBT ISSUANCE PROGRAM, (iii) Document type: Base Prospectus.
On the date of this Base Prospectus, the legal and regulatory regime applicable to SFH results from the following provisions:
- (a) Articles L.513-3, L.513-5, L.513-7 to L.513-26 and L.513-28 et seq. of the French Monetary and Financial Code (as amended from time to time);
- (b) Article 74 of law n°. 2010-1249 of 22 October 2010 on banking and financial regulation;
- (c) Articles R.513-1, R.513-3, R.513-4, R.513-6 to R.513-12, R.513-14 and R.513-15 to R.513-21 of the French Monetary and Financial Code (as amended from time to time);
- (d) the Regulation (réglement) no. 99-10 dated 9 July 1999 issued by the Comité de la Réglementation Bancaire et Financière (Banking and Financial Regulation Committee) as it may be amended from time to time (the CRBF Regulation);
- (e) the various ACPR’s instructions applicable to SFH.
The exclusive legal purpose of the SFH is to grant or finance home loans and hold securities and instruments under the conditions set out in the French Monetary and Financial Code.
The proceeds of the issuance are lent by SG SFH to Societe Generale in accordance with the provisions of the Facility Agreement and that are fully secured by the transfers by way of security of the full title (remise en pleine propriété à titre de garantie) of guaranteed home loan receivables in favour of the Issuer pursuant to the provisions of Articles L.211-36 et seq. of the French Monetary and Financial Code and the provisions of the Collateral Security Agreement.
Pursuant to Article L. 513-11 of the French Monetary Code, the sums deriving from the loans, or assimilated receivables, exposures and securities eligible to the assets of a SFH are allocated in priority to the payment of the OFH and, in accordance with Article R.513-7, a SFH must ensure that at any time the funding of its liquidity need over a period at 180 days, taking into account the provisional fund flows arising from the principal and interest amounts over its assets and the net flows relating to the forward financial instruments.
Article L.513-20 of the French Monetary and Financial Code precludes the extension of any safeguard procedure (procédure de sauvegarde), judicial reorganisation (redressement judiciaire) or liquidation (liquidation judiciaire) in respect of the SFH’s shareholders to the SFH and, provides for a regime which derogates in many ways from the French legal provisions relating to insolvency proceedings.
12. (Optional) List any possible oracle data sources for the proposed Collateral type.
The OFH Token is on Bloomberg (ISIN FR0013510518).
13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.
This first experimentation of a refinancing structure of security tokens through a DeFi protocol will allow us to shape the future for bond refinancing business activity. For this first step, we cannot rely on a liquid market, mainly because there is no exchange for security tokens.
However, the new European regulation known as “Pilot Regime” that will enter into forth in the coming month, could offer some DLT-based multilateral trading facilities for Security Tokens, and OTC platforms should bloom with the growth of the Security Token ecosystem. Future transactions would help to propose a liquidation process with interested parties and more in line with the MakerDAO keeper feature.
This document has been prepared by Societe Generale - Forge, a subsidiary of Societe Generale (“Societe Generale”) exclusively for the benefit of MakerDAO.
In preparing this document, Societe Generale – Forge has used information available from public sources.
No express or implied representation or warranty as to the accuracy, completeness or relevance of such information is made by Societe Generale - Forge, or any other party. Societe Generale - Forge has neither performed nor obtained any independent verification of information obtained from external sources. No responsibility or liability (express or implied) is accepted for any errors, omissions or misstatements by Societe Generale – Forge or for the consequences arising from the use of the information contained in this document, except in the case of fraud or any other liability which cannot lawfully be excluded.
The contents of this document are subject to amendment or change at any time and Societe Generale – Forge will not inform MakerDAO of any such amendment or change.
This document is of an information and not of a commercial or of a regulatory nature.
Opinions expressed are the opinions of the authors and do not necessarily represent the opinion of Societe Generale - Forge. Any views, opinions or conclusions contained in this document are indicative only, are not based on independent research and do not represent an offer or commitment, express or implied, on the part of Societe Generale _ Forge to underwrite or purchase any securities or any financial instrument(s) or digital assets referred to herein or to commit any capital, nor does it commit Societe Generale to enter into an underwriting agreement or similar commitment to finance, such an offer being subject to contract, the completion of satisfactory due diligence and all necessary credit, management and other approvals being obtained.
The market information displayed in this document is based on data at a given moment and may change from time to time.
Any information in this document is purely indicative and has no contractual value.
The commercial merits or suitability or expected profitability or benefit of any transaction described in this document to MakerDAO particular situation should be independently determined by MakerDAO. Any such determination should involve an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of any such transaction, based on such information and advice from MakerDAO’s own advisers and such other experts as the MakerDAO deems relevant. Societe Generale – Forge shall not be liable for any failure by MakerDAO to obtain such information and advice.
Societe Generale and its affiliates (the “SG Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, as well as providing investment, corporate banking, asset and investment management, financing and strategic advisory services and other commercial services and products to a wide range of corporations, governments and institutions from which conflicting interests or duties, or a perception thereof, may arise. In the ordinary course of these activities, parts of the SG Group at any time may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or financial instruments (including derivatives, bank loans or other obligations) of institutional or corporate clients, potential counterparties or any other company that may be involved in a transaction.
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This document is issued in France by Societe Generale - Forge and shall be governed by and construed in accordance with French law.
Societe Generale – Forge is an investment firm that is authorized and supervised by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) (the French Prudential Control and Resolution Authority) and regulated by the Autorité des marchés financiers (AMF) (the French financial markets regulator).
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Société Générale-Forge is a limited liability company (société anonyme), with a registered office at 17 Cour Valmy 92800 Puteaux, registered at the Nanterre Trade register under number 882 696 628.