[Security Tokens Refinancing] MIP6 Application for OFH Tokens

This MIP6 is a new landmark in DeFi and showing how DeFi and TradFi are merging together to create Finance 2.0.

Need to thanks @Growth-Core-Unit for the amazing work. I joined only at the end.

On a risk side, this deal doesn’t have a good risk/reward, you can see LIBOR 1 week, it’s not much. Risk is super low on the collateral (AAA, quite a good haircut even taking in account the currency risk, as safe as it gets) but there is always an execution risk and there will be quite a bit of work.
This collateral should be seen as step 1 of what is next to come. Integrating all publicly traded bonds (that will be on Ethereum as we all know) and providing repo. Quite a huge market.

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Amazing! Very clear and elaborated proposal. Security Tokens refinancing. by SocGen using MakerDAO…we are living a real hinge of history !

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Great to see this application coming through. The first of many interactions at the frontier of the regulated bond market. Having more solid players and securities should be the way forward.

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No info about the stability fee , or any existing rate had been announced ?

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It is great to see a fully rated AAA bond get proposed as a collateral asset from a top notch institution! In addition, the open source CAST Framework for security tokens is certainly something to explore further.

It looks like the bonds are 5 year bonds that were issued in 2020 and mature in 2025 with 0% interest. Did I read that right? Wow - @SebVentures wasn’t kidding when he said there would not be much interest earned. Is that rate in line with comps? The US effective AAA corporate bond rate is currently 1.93%, I’m not sure what it is in France but I am sure it is a lower than the US.

There was very little provided on the details of the underlying real estate loans. Are we talking about residential mortgages? Commercial office lending? Construction loans? I would suggest that the due diligence team dig into their real estate lending transaction history, the subscription agreement, and the ratings analysis to truly understand the cash flow characteristics, the credit enhancements, and why this is rated AAA.

Here are some more areas for due diligence: the proposal suggests that Maker’s term will be 6-9 months. So Maker acts as a source of liquidity for SG-Forge for a bond that does not otherwise have an active secondary market? And will SG-Forge pay back the DAI loan and close the vault in 6-9 months? Will there be cash flows expected during that time frame? What will be SG-Forge’s intended use of capital?

The risk seems low on this deal. The risk that the bond value will change is minimal, the counterparty risk (SG-Forge) is really low, the regulatory risk is likely lower, and the pool will be overcollateralized. From that perspective it seems like a excellent experiment and a safe, non-correlated asset for the Maker Vaults.

I just wish it paid some interest.

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A landmark day, even more for traditional credit institutions than MakerDAO. A day that is putting again the focus on how responsibilities can be shared and decentralised across an ecosystem of borrowers, structurers, intermediaries, and financiers. Immense kudos to those who contributed.

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This is big!
Congrats to Maker and SG-Forge on being the first in the tradfi-DeFi blend.

Point #8

Maker community will vote a community representative. Maker community will vote the security representative jurisdiction in France. Might need some due diligence here.

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this application shares many traits conceived in CSC proposal. I have capture some genuine good schemas of this application which could help bring clarity starting with the monies flow.

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Although I do not intend in no way to play down this monumental advancement in connecting DeFi to TradFi, a few open points emerge from a quick read of this MIP6. I am sure that collateral onboarding will help clarifying. I paste my random questions below hoping they can be useful,

  • What would be the effective yield, I.e. would OFH tokens be contributed at par vs. third-party valuation?
  • What is the reason behind a mismatch between the maturity of the underlying security and the vault?
  • Given the centralised nature of the collateral pledge, where an agent actually would take ownership of the tokens rather than a programmatic contract, what is the view of the onboarding team circa the adherence to the standards of security and decentralisation? The same applies to the valuation oracles.
  • How does the community intend to enforce virtuous behaviour of the Maker Delegate?
  • Given, as stated, the lack of liquidity for this type of tokens in approved otc venues, wouldn’t have been more appropriate to wait for this ecosystem to emerge or, in the interim, for the sponsor to offer some kind of buyback guarantee / backstop to protect maximum downside in the remote case of impairment?
  • Couldn’t the sponsor have facilitated trading of those tokens in the DEX ecosystem in parallel? In order to provide liquidity to the market? Does it intend to do so in the future?
  • Given the costs of onboarding such collateral, in terms of time spent and advisory costs for the community, what is the sponsor’s view of a pipeline for this type of transactions going forward? How does SG view Maker alongside other sources of financing within DeFi and in connection to the CBDC projects they have been participating in?

I personally truly believe this type of collaboration goes in the right direction of expanding Maker’s footprint via diversifying underlying exposures, while outsourcing to others most of the structuring and legal work. I am looking forward for the DD to proceed on this collateral onboarding application.

Again, as usual, these are my personal opinions without any legal or investment implication attached.

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Hi all, my name is Brady Dale and I’m a reporter with The Defiant.
I don’t really know how to talk to MakerDAO any longer now that the Foundation is gone. I’m trying to do a deeper dive into this deal and have some questions. How can I get started talking to the DAO about those things?

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The Defiant! What took you so long? :slight_smile:

There’s a Media Forum Media - The Maker Forum you can also reach out to @Davidutro

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Oh great, will do, thx!

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Hey Brady, you can also speak to @Growth-Core-Unit about this

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MakerDAO :muscle:!!!

This is huge, big congratulations to the teams involved in procuring this MIP6. Can’t say enough about how exciting this is, and could be, for the future of MakerDAO!

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:clap: :clap: :clap:

Great day, monumental achievement @SebVentures and the invincible Maker Team. To the Moon! :rocket: :wink: :clinking_glasses:

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“The Pledge does not imply a transfer of ownership of the OFH Tokens to MakerDAO, unless the Pledge is enforced;”

Not clear to me, what the above legal language exactly mean, since I lack a legal background? Without the transfer of ownership, can the collateral be sold to mitigate potential losses? Given the unique nature of the collateral, how would one go about sourcing a bid to sell such a collateral and be able to settle into proceeds?

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Given the maturity is less than 4 years away and the extent of the over collateralization vs face value, it would be an option to just hold the zero-coupon bond to maturity for something like a 20%+ annualized return.

Not to say that is what we would choose to do. But we would not, strictly speaking, need to locate a buyer if we had faith in the bond being paid in full at maturity.

Not a lawyer, and there may also be translation going on. But probably means that we do not own the collateral unless/until claims on it are enforced.

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Interesting points @PaperImperium.

I fully agree with you with the huge margin of safety - that would be enhanced by the over-collateralisation, but I struggle to reconcile the 20% return calculations. I think the nature of the collateral, and the structure, offer great downside protection, but the return is capped unless there is a ‘purchase’ below par of the token which I don’t think would be the case.

I think that the absence of the transfer of ownership is related to the need, for policy and maybe regulation, of having a recognised intermediary (the Agent) dealing with the collateral. It is more than fair and customary, but it is not in line with the (long-term) ambition of decentralisation - still, a great step forward.

I’d truly appreciate the CUs or anybody else providing more detail on a review of the application, as I’m sure it will happen.

I’m studying this myself, although limiting myself only to public info. As usual, if the community believes my expertise to be of any use, I’m happy to get involved. As usual, no legally enforcing opinion nor investment advice or advice of any kind.

Again, kudos to everyone, this is truly a monumental step forward.

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I’m not a french lawyer either, but in TradFi secured financings a lender usually advances a loan to a borrower who grants a security in favour of the lender over specific assets owned by the borrower itself. The borrower maintains ownership of the asset until an event of default occurs and the security is enforced, resulting in the transfer of the ownership of the asset to the lender.

The overcollateralization bit is not clear to me. The MIP6 Applications indicates that "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". Thus, MakerDAO would not be entitled to get 100% of the redemption price at maturity, but only an amount equal to the DAI Loan plus unwinding costs.

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I could not see how collateral agent is defined like with other participants, given that the collateral agent performs the important role of the collateral test to ensure that the collateral is valued correctly.