(TM2-DROP) MIP6 Application: Technology Metals Market (TM2): Trade Finance for Trading of Physical Metals

This is the MIP6 Proposal for the senior tranche providing for trade finance related to the physical trading of metals originated by Millenium Metals to provide liquidity for metals traders on the Technology Metals Markets (TM2) www.tm2.com platform. TM2 will act as the “sponsor.” The TIN Tranche will be held by TM2 as well as a variety of metals and financial markets professionals. Peter Karos [[email protected]] is the main contact at TM2.

Centrifuge will provide the technology and framework for bringing this asset to MakerDAO. The main contact from the Centrifuge team will be Colin Cunningham [[email protected]]

  1. Who is the interested party for this collateral application?

Technology Metals Markets (TM2) is a spot metals execution platform domiciled in the UK with global offices in Iceland, Switzerland, China, and Russia that was established to focus on bringing transparency, liquidity, and standardization to the opaque markets related to technology metals (i.e. lithium, cobalt, germanium, etc.) which are components of semiconductors, lithium ion batteries used for EVs, and solar panels, for example. NASDAQ is a technology partner of TM2 providing the underlying matching engine. Ideanomics (ticker: IDEX;NASDAQ) is a shareholder of TM2.

The infrastructure that TM2 has built provides for sourcing and trading of metals in both the primary (initial sale of metals from supplier onto the market) and secondary markets where the metals are exchanged via tokens that give rights to warehouse receipts. TM2 currently has 11 metals listed on the platform for spot trading (platinum, palladium, silver, rhodium, indium, iridium, dysprosium, osmium, tellurium, rhenium and ruthenium). The growth strategy includes:a) adding an additional 10 metals to the platform before the end of 4Q 2021, and an additional 13 in 1Q 2022, b) applying for regulatory approval to launch futures in several jurisdictions and become a regulated futures exchange with a targeted launch date of 4Q 2022, c) opening offices in Dubai and Singapore, d) adding traders with experience at global commodity houses and e) adding to the platform the more established and liquid metals that trade on the CME and LME.

TM2 considers that these pools of trade finance loans are ideally suited for token-based securitization structures. Considering the “back to back” nature of the trades, the short duration (30 days or less) of the loans, the planned over collateralization of the loans and the fact that the metals do not leave the warehouse, the originator has significantly de-risked the trades and therefore, the investors exposure in the senior tranche. The high deployment/repayment rate and hence cash flow velocity of the underlying portfolios allow for structural features that create liquidity for token investors via continuous redemption/redeployment opportunities.

A key aspect of TM2’s investment approach and value proposition is to combine the innovative aspects of a token-based securitization vehicle with institutional-grade trading, analysis and market experience. Accordingly, TM2 intends to partner an experienced hedge fund and/or a global commodity trader for the first asset pool / token-based securitization structure. TM2 considers the anticipated transaction with MakerDAO as an innovative alternative to a traditional capital markets based securitization structure, to which TM2 will also continue to access and scale.
Following a successful completion of an initial, smaller transaction with MakerDAO, the hedge fund and/or global commodity trader would be prepared – depending on terms and conditions – to significantly scale the anticipated tokenized trade finance structure.

  1. Provide a brief high-level overview of the project, with a focus on the applying collateral token

TM2 and Millennium Metals have agreed to launch the token-based trade finance pool with the following characteristics :

Underlying assets for collateralization will be metals held in the form of warehouse receipts. In physical commodities trading, a negotiable warehouse receipt is the standard document that provides for proof of ownership and guarantees the existence of a particular quantity, type, and quality of a commodity stored in a warehouse, vault, or depository for safekeeping. In addition to proof of ownership, a negotiable warehouse receipt allows for transfer of ownership without the metal having to deliver the physical commodity and is the standard document used to settle expiring futures on widely recognized metals exchanges including the Chicago Mercantile Exchange (CME) and the London Metals Exchange (LME). The metals will be held in bonded warehouses (commonality with LME and CME) within the TM2 supplier network. Weekly inventory checks for verification of metals in the warehouse will be done per industry standard. Most importantly and pertinent to the Lenders in the TM2 pool, it is industry standard in physical commodity trading that warehouse receipts are eligible and used as a claim on collateral by global financial institutions in trade finance.
Initially, it is intended to create a trade finance vehicle or series of vehicles with a net asset value beginning with USD 10 million, and scaling to USD 100 million to be used to facilitate liquidity on the TM2 platform. Given the lack of trade finance for small and medium size metals traders, it is the medium-term goal to eventually grow and add additional pools to extend trade finance to traders on the TM2 platform.
TM2 considers that these pools of trade finance loans are ideally suited for token-based securitization structures. Considering the “back to back” nature of the trades, the short duration (30 days or less) of the loans, the planned over collateralization of the loans and the fact that the metals do not leave the warehouse, the originator has significantly de-risked the trades and therefore, the investors exposure in the senior tranche. The high deployment/repayment rate and hence cash flow velocity of the underlying portfolios allow for structural features that create liquidity for token investors via continuous redemption/redeployment opportunities.

Economically the transaction can be characterized as a revolving trade finance loan and the transaction structure and documents will be set-up accordingly and will also include a set of eligibility criteria. There will be extreme focus on risk management and end to end process reliability.

Flow of Collateral and Funds:

  1. Purchase contract between metals suppliers and Issuer digitally approved and signed on blockchain
  2. Supplier invoices Issuer - payment terms, not more than 30 days
  3. Issuer accepts the invoice and pays the Supplier 20% of the value of the metal. Supplier transfers warehouse receipt to Issuer (to the order of the SPV where collateral is held in form of NFT)
  4. Issuer draws 80% of the invoice amount from the revolver to pay the supplier.
  5. One payment is made in full, financing is recorded digitally.
  6. The issuer once in legal possession issues metals in minimum exchange lot sizes (or higher) and sells metals to buyers on the exchange platform.
  7. Buyer pays Issuer into collection/escrow account on exchange
  8. Once money is in an escrow account, the SPV releases the warehouse receipt as the related principal is repaid.
  9. Surplus cash released to Issuer
  10. purchase/financing cycle begins again

The SPV will enter into (i) a servicing agreement with the Asset Originator (Millenium Metals) for the first pool) as well as (ii) a management agreement with TM2.

  1. Provide a brief history of the project

Please view Section 1 & 2 for a brief overview of TM2 and Millennium Metals pool transactions. TM2 is a spot metals execution platform that can scale rapidly via subsidiary Millennium Metals and it’s global supplier network. TM2/Millenium Metals intends to become a frequent issuer of token-based securitisation instruments and wishes to establish a long-term strategic partnership with MakerDAO
About TM2
TM2 was founded in 2018 by Petur Georgesson with the goal of creating a digital spot metals execution platform for technology metals that brings transparency and liquidity to a fast growing subset of metals not traded on the LME or CME. The current shareholder structure of TM2 is: Mr. Georgesson (60%), TM2 Employees (~20%) Ideanomics (IDEX: NASDAQ) (10%), and strategic industry individual investors including alumni of Glencore (~10%).
Millennium Metals is a subsidiary of TM2 that was founded to provide primary issuance of metals sourced from the TM2 global network of suppliers.
About Centrifuge
Centrifuge provides the infrastructure to allow transparent and secure onboarding of RWAs to MCD.
TM2 is one of many projects currently in the pipeline to help MakerDAO scale RWA backing to USD 300m by the end of 2021.

  1. 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.

Technical documentation about Tinlake can be found here: GitHub - centrifuge/tinlake: bringing individual, non-fungible assets to DeFi 2
Maker specific implementation here: GitHub - centrifuge/tinlake-maker-lib

  1. Link any available audits of the project.

Both procedural and smart contract focused audits. Centrifuge has conducted several audits of its technology stack.
The audits can be found here: security/audits at master · centrifuge/security · GitHub

  1. Link to any active communities relating to your project.

A Centrifuge Discourse Forum is planned.

  1. How is the applying collateral type currently used?

Millennium Metals is currently internally financed by TM2.

  1. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

TM2 will incorporate a Delaware (USA) limited liability company (the special purpose vehicle, “SPV”). This SPV will be formed to finance the trading of metals in the form of warehouse receipts.
This SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by TM2 financial, operational and/or legal health. TM2 will appoint an independent director in the board of the SPV to provide oversight and enable a smooth transition in an event of default.

  1. Where does the exchange for the asset occur?

The exchange of the asset occurs at the SPV that underpins the Centrifuge pool that TM2 will be managing. The SPV enters into a subscription agreement with lenders who receive DROP from the SPV in turn for providing DAI. The DROP token can be redeemed against the cash flows of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and is the primary way for interacting with these tokens. See question #2 (“Flow of Collateral and Funds”) for detailed explanation.

  1. (Determined by Legal Domain Team) 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.

The underlying structure and economics of the transaction are the same as a typical revolving trade finance structure used by commodity traders and provided by banks/specialty finance funds. Despite the normal terms described above, any involvement with cryptocurrencies or DeFi gains the attention of regulators. TM2 internal compliance and legal has engaged proper legal counsel (Mayer Brown in the US and Collyer Bristow in the UK) to liaise with regulators to ensure the funding process ensues without delay.

  1. (Determined by Legal Domain Team) 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.

Please see Section 10.

  1. (Optional) List any possible oracle data sources for the proposed Collateral type.

The possible oracle data sources may consist of, but not limited to, daily pricing from metals exchanges and the information and documentation from “Flow of Collateral and Funds” section in question number 2.

  1. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

The metals and the warehouse receipts come in industry standard form. It can be assumed that there will be interested parties to either acquire the TM2 pool related DROP tokens and/or the underlying assets if offered / marketed.

3 Likes

I am a bit confused here why one wouldn’t just have a setup to allow capital and assets of traders to finance the transactional liquidity needs on both sides of the trade. This would allow you to offer returns to your traders just for holding metal positions and cash in accounts.

The above is like asking Maker to become a indirect participant in this trading (i.e. we will hold metals and provide cash) but Maker will not get any return for holding the metals (via the DROP/TIN tokens) and ofc gets some return for the cash supplied.

One issue here is going to be the oracle requirements on the metals since these are markets with fast moving price changes is that collateral could easily get underwater quickly.

While this could happen with real estate or other markets I don’t think those markets by nature could have the volatility that Metals markets can have. This is particularly true as more and more traders start piling into these markets. Though on the other side of this someone probably will argue now that we have more gold and silver notional trading prices don’t move as much…

Also just a heads up. @SebVentures has a number of issues that Centrifuge needs to address before any more MIP6’s from them will make executive. I also would await a report from RWA CU and risk. We really need to think about the greenlight process on these MIP6’s btw. I’d rather these be approved for CU work and only after that work and reports generated should governance then discuss approval.

My biggest issue is going to be what I said in the past regarding collateral additions. Stuff that is 10M or below simply are not going to earn enough revenue for the protocol to cover all the associated expenses. I really want to see a comment from growth, SES, RWA and whichever CU is covering oracles on how Maker is going to cost effectively deal with all these small MIP6 applications? What is the minimum size in terms of real growth potential over what time period to be profitable for the system.?

My concerns with these are from a workflow perspective. Who/where do we approve these for full CU work review, and where should we expect them to be stopped (up front) or when they finally get set for executive voting.

2 Likes

It is my understanding that those issues will be fixed way before this MIP6 will be onboarded. It is no secret that MIP6 → onboarding is a few months. The team is getting bigger, but still a lot of work, especially as we are looking more and more deeply at the deals.

That would lead to prioritization to be done by the CU.

In this MIP6 (like many) 10M is a start before scaling. It is something I advise, it’s a relationship that need to be build, no need to grant 100M on the first run (which is not possible anyway currently). Obviously, anyone can ask 100M of DC, scaling there while keeping good internal control is more difficult and not everyone will be able to.

I would propose community to assess RWA MIP6 in a relative way. What is already in the pipe and what are the new one and does it bring new value. I said that I think we should focus on around 10 RWA (let’s say up to 20 max, like the Warren buffet 20-slot rule). At least for the RWF CU, more RWA CU can add more slots.

5 Likes

metals have a good deal of price volatility. What portion of these metals will be stable enough for debt financing and what is the time frame? Are they asking for a 80% LTV over 30 days? From Feb 15th to early March in the data below there was almost a 15% price drop in platinum

For example, here is the price data for platinum over the last year.

1 Like

Hello and thank you for submitting this MIP6 application. Just a few questions here. Can you please expand on your relationship with Nasdaq Market Technology—is this a relationship based with only the EMEA division, and when do you see TM2 aligning itself w/the North America division of Nasdaq?

Can you please comment on your relationship with Gratomic, and Rare Worlds Metal Mints—are both part of this MIP6 application? (I’m sorry if you stated such and I missed it) If Gratomic is included, one can assume that the company is following a safe and environmentally sustainable business in Namibia, correct?

And last but not least—is the idea here to get funding via DAI to create liquidity within your real-time order book, or to fund delivery of metals purchased in the secondary market? Not sure if I understand the purpose of the 10M DC. Sorry about that.

In paragraph below (from section 2), your suggestion has been considered and discussed at the TM2. The initial funding is for the use of TM2 subsidiary, Millennium Metals, to facilitate liquidity from the primary market to the secondary market where the metal can freely trade in digital form. This is not a speculative function.

“Initially, it is intended to create a trade finance vehicle or series of vehicles with a net asset value beginning with USD 10 million, and scaling to USD 100 million to be used to facilitate liquidity on the TM2 platform. Given the lack of trade finance for small and medium size metals traders, it is the medium-term goal to eventually grow and add additional pools to extend trade finance to traders on the TM2 platform.”

Neither TM2 nor Millennium metals are asking anything of the sort that resembles “holding metals” i.e. direct ownership by the SPV. As stated, the SPV will hold as COLLATERAL, the NFT which is the tokenized form of a warehouse receipt as security vs the outstanding loan and not be the legal owner which is subject to fluctuations in price both positive and negative.

Oracle requirements: please see answer to question number 12. Direct live prices can be fed via TM2, LME and/or CME.
To clarify, the purpose of the loan is for liquidity facilitation of the metals bought from the supplier warehouse (primary market) and then be sold into the secondary market in back to back transactions, meaning taking as little price risk as possible in “back to back” transactions. The reason to facilitate these trades is because there is demand in the secondary market and NOT to speculate.
The term sheet/loan docs will read that this loan will have a collateralization rate of 125% which means, for example, if MM/TM2 purchases $10mm worth of metal from the supplier, MM/TM2 will pay $2mm form their own cash and borrow $8mm to pay for the balance. (2mm/8mm=25% buffer plus the full value of the metal 100% = 125% overcollateralization. Please see “flow of collateral and funds” in section 2. Considering the overcollaterization, back to back nature of the trades, and the fact that the metals do not leave the warehouse, significantly reduces the risk of the lender and avoids, as you put it, “get underwater quickly”

I have proposed 30 days as the revolver term, but the true nature of the vast majority of these trades are back to back and will be settled in a week or less. That being said, there may be instances where, for example, the minimum purchase amount from the warehouse (primary market) is $1mm for Ruthenium, but the back to back demand is only $900,000 in the secondary market. That means there is exposure on $100,000 which if that happens, MM will work out of the balance over the following days via the secondary market with the assistance of the TM2 platform salesforce. Even if, for example, it has to be force liquidated at an average price down 10%, that is a $10,000 loss and well within the overcollaterization range that protects the lenders from loss. As a reminder, this a trade and liquidity facilitation exercise and not a speculative exercise. The final term sheet/loan docs will reflect limits on maximum exposure when facilitating.

TM2 is a global marketplace and fully aligned with NASDAQ on a global basis. In addition to providing the matching engine (fix connectivity) for TM2, they are also providing market surveillance/compliance services to oversee client trading activity and ensure platform standards are met. Marketing and data distribution (Reuters, Bloomberg, etc). There are a number of other initiatives that we are working on and will disclose when finalized in the coming weeks/months.

Both Gratomic and RWMM are direct issuers (suppliers) of metals onto the TM2 platform. Neither Gratomic, nor RWMM are part of this MIP6 application.

I cannot speak for Gratomic, but I have attached a link here to their investment deck https://gratomic.ca/investors/ Please see page 14 which outlines their environmental initiatives.

The idea is to create liquidity based on demand from end customers of TM2, not to speculate. Please see comments in response to questions from other forum members above.