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3. Eligible Collateral

3.1. Criteria for Eligible Collateral

We expect Validators to solely and exclusively recognize assets as Eligible Collateral when such assets conform to the criteria below.

i. Criteria for the Eligibility of Assets:

  • United States Treasury Bills with a remaining time to maturity of 180 days or less.
  • Wrappers of United States Treasury Bills such as money market fund units (in so-called tokenized form over appropriate distributed ledgers—such as Ethereum Mainnet—or traditional book entry form) or any other comparable wrapper, that comply with the above mentioned remaining time to maturity criteria - subject to specific definition of the financial product in scope.

ii. Ancillary Criteria for the Eligibility of Assets:

  • So-called In-Transit Cash, defined as Deposit Equivalents in an amount equal to placed-and-executed-but-not-yet-settled buy orders for assets defined in (i). In case such orders are ultimately canceled, settled, or never settled, such balances shall no longer be recognized.
  • So-called In-Transit Securities, defined as executed-but-not-yet-settled sell orders for assets defined in (i) (at the time of purchase) in case, for the avoidance of doubt, neither the securities nor balances in Deposit Equivalents are listed in the Collateral Storage (and more specifically Custody Account and Deposit Account of the SPV).

3.2. Valuation Policy for Eligible Collateral

Eligible Collateral shall be recognized at their daily market value (according to the last closing price) published on www.treasurydirect.gov. Alternatively, for approved wrappers, the recognition of the most recent NAV (net asset value) calculated by a third-party agent and published by the asset manager / fund administrator is admissible.

It is understood that Validators and Minters might not observe the same market price in case they access the market data at different times. Minters shall consider this when requesting signatures for updateCollateral() calls from Validators. With Signature we refer to the cryptographically hashed meta information of a transaction with the private key of the Validator which allows the Minter to perform a certain Protocol transaction after the Validator has verified that the conditions for such a transaction are met.

In proposing valuation options for Eligible Collateral, the Adopted Guidance document has considered two alternative options: mark-to-market, and at-cost, opting ultimately for a mark-to-market approach. The two options somehow reflect similar accounting methodology for so-called held for trading or available for sale assets, and have a set of pros and cons that have been analyzed when proposing one over another:

Fair value representation: the current executable market price of an asset remains the most accurate representation of its value at any given time. By opting for a mark-to-market approach Minters would see the immediate benefit of the appreciation of a fixed income asset as it approaches maturity, without having to realize it. Given the eligible instruments, we believe that a mark-to-market approach would allow Minters to operate based on the most accurate level of overcollateralization.

Non-arbitrage: reflecting collateral value fluctuations onchain can prevent misalignments and unexpected behaviors due to arbitrage opportunities among parties. This is particularly important in scenarios of extreme price movements driven by significant interest rate changes. We are aware that recognizing the mark-to-market fluctuations of fixed income instruments onchain, even without the obligation for a Minter to redeem those assets at will, could expose the structure to interest rate risk and, in extreme scenarios, bank-run phenomena. While we believe that those effects should be accounted for and mitigated by appropriate levels of overcollateralization, similar to what happens for a bank's core capital, we think that the nature of Eligible Collateral today, as well as the dominant macroeconomic conditions, make those risks manageable.

Capital efficiency: the continuous increases in Minters' Owed M due to the accrual of Minter Rate introduces natural pressure on the Collateralization Ratio. Valuing collateral at market price can alleviate this pressure, due to the time value of the instruments currently considered eligible.

It is important to remember that the recommended Valuation Policy is strictly interdependent with the nature of the Eligible Collateral. Following an evolution of the eligibility criteria, e.g. expanding towards longer maturities of different asset classes, will require, among other things, a revision of the Valuation Policy. This will be valid also in case of significant shifts in the current economic landscape.

Collateral that is to be considered Eligible Collateral under the conditions set forth in Ancillary Criteria for the Eligibility of Assets shall be valued without a haircut.

3.3. Collateral Storage

Collateral shall only be recognized as Eligible Collateral by the Validator if this collateral is appropriately held in the Collateral Storage.

Given the current technological conditions, and the nature of the Eligible Collateral proposed by the Adopted Guidance, with appropriate Collateral Storage we refer specifically to the fact that the entity that legally owns the collateral (SPV) fulfills a set of requirements as described below. The fulfillment of these requirements should be verified through cooperation between Minters (via appropriate transparency), Validators, and Governance oversight in a way deemed satisfactory by Governance. The appropriate execution of the Mandatory Contracts described above should satisfy those conditions.

Based on this set of fundamental requirements, the SPV:

  • is an orphaned entity;
  • is minimally affiliated (via its shareholders) with or (practically) controlled by any Validator or Minter or the affiliates of any Validator or Minter;
  • does not conduct any other business except the storage of collateral for Minters and issuance of Notes to Minters;
  • is a restricted-purpose vehicle that prevents entering into any other liabilities but the ones directly related to the storage of collateral and the issuance of Notes against such collateral;
  • is designed to be insolvency remote;
  • is incorporated in an Approved Jurisdiction, as described below;
  • possesses all required licenses and permissions (if necessary) to store collateral and to issue Notes against such collateral;
  • is audited on an annual basis by a licensed auditor deemed appropriate to perform the task.

Additionally, any Notes issued to the Minter shall comply with the following in order to be considered Eligible Collateral:

  • Full asset segregation of collateral not only at the Minter level, but also at the level of each wallet address controlled by the Minter — in case the Minter controls more than one permissioned address.
  • Limited recourse so that the claims of any Minter are strictly limited to the collateral belonging to its Notes.

3.4. Approved Jurisdictions

Given the current technological conditions, and the nature of the Eligible Collateral proposed by the Adopted Guidance, any form of collateral shall only be recognized as Eligible Collateral by the Validator if the SPV is located in one of the jurisdictions listed below:

  • Luxembourg

As for other elements of the Adopted Guidance, the list of Approved Jurisdictions (as described above) can be amended any time through a Governance vote. In case the list is amended, Actors are expected to ensure compliance with and enforceability of the rules set out in the Adopted Guidance in such a new jurisdiction.

Candidates for Approved Jurisdictions shall comply with the following minimum requirements:

3.4.1. Bankruptcy Remoteness

The jurisdiction provides legal and structural mechanisms that reduce the risk of insolvency for the legal entity, reinforcing the effectiveness of provisions that prevent creditors and investors from initiating insolvency proceedings against the legal entity or seizing its assets or the assets of its compartments, estates or sub-funds.

3.4.2. Non-Petition and Non-Seizure Provisions

Jurisdictions must uphold provisions that prevent creditors and investors from initiating insolvency proceedings against a legal entity or seizing its assets or the assets of its compartments or estates or sub-funds, thus ensuring the legal entity's bankruptcy remoteness.

3.4.3. Priority of Payments and Subordination

The legal system recognises and enforces contractual or statutory arrangements that clearly define the priority of payments and the subordination of claims among investors and creditors.

3.4.4. Regulatory Compliance

The jurisdiction has a regulatory framework that supports the business activities of the legal entity, including clear guidelines for the trading of financial instruments and Eligible Collateral associated with them.

3.4.5. Legal and Regulatory Framework

The jurisdiction has a legal and regulatory framework that permits the issuance of financial instruments and the investment in Eligible Collateral.

3.4.6. Political Stability

The jurisdiction exhibits a high degree of political stability, characterized by a consistent and predictable legal and regulatory environment, minimal political unrest, and an upholding of the rule of law.

3.4.7. Dispute Resolution

An effective legal framework for dispute resolution is in place, including access to courts or arbitration panels.

3.4.8. Asset Segregation

Collateral for each Minter is either to be stored in a separate legal entity per Minter or the jurisdiction must provide legal frameworks that enable the establishment of separate compartments or estates or sub-funds within a single legal entity, ensuring that each compartment or estate or sub-fund is its own distinct pool of assets and liabilities. There must be clear legal recognition that assets within one compartment or estate or sub-fund are exclusively reserved for the investors and creditors of that compartment or estate or sub-fund and are protected from the claims of creditors of other compartments or estates or sub-funds and claims of creditors of the legal entity to ensure the functioning of the intended wind down processes, as described below.

3.4.9. Limited Recourse

The legal system must enforce that the claims of investors and creditors are strictly limited to the assets of the compartment or estate or sub-fund to which they have exposure. In cases where the assets of a compartment or estate or sub-fund are insufficient to satisfy the claims, the legal framework permits the extinguishment of any remaining claims, prohibiting further recovery efforts.

3.4.10. Investor Protection

There are robust mechanisms in place to protect investors, including clear disclosure requirements and the enforcement of fiduciary duties by the managers of the legal entity.

3.4.11. Operational Infrastructure

The jurisdiction boasts a developed financial infrastructure capable of supporting complex financial transactions, including experienced service providers and legal counsel with expertise in financial matters.

3.4.12. Custody Relationship

The jurisdiction recognises and enforces the legal nature of the custody relationship between the legal entity and its custodian, ensuring that assets held in custody are protected and segregated from the custodian's general estate in the event of its bankruptcy.

3.4.13. Audit

The jurisdiction requires the mandatory (by law) audit of the annual financial statements of the legal entity.