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The purpose of USDM Reserves is to provide strong assurances regarding the solvency of issued USDM, so users can be comfortable that their USDM can always be redeemed at $1.
USDM Reserves are held in the name of the Company with regulated financial institutions in bankruptcy-remote accounts, segregated from the Company's operating accounts, held on behalf of, and for the benefit of, Users that request a redemption of USDM.
USDM is collateralized by short-duration US Treasuries (T-Bills) with an average duration of 60 days or less. US Treasuries are considered the safest USD-denominated asset.
Collateral can be composed by any of the following instruments:
- Treasury bills, or treasury notes with near maturity.
- Money Market Funds investing in short term US treasuries.
- Treasury ETFs.
- Reverse Repurchase Agreements (repo's) collateralized with US Treasuries.
A small portion of the USDM Reserves will inevitably be "in transit". Such occurrence happens when users purchase new USDM, as those assets need to be off-ramped and sent to the broker account. Given the 24/7 nature of USDM can result in assets waiting for banks to open for fiat transfers to settle and for markets to open to purchase assets.
Assets in transit should generally account for a small single percentage of assets. Notwithstanding, the company goes to a great extent to minimize such non-T-Bill exposure.
To protect USDM holders from interest rate risk, USDM Reserves are always over-collateralized. This over-collateralization acts as an equity buffer to absorb potential variations in the underlying asset values resulting from interest rate increases.
The collateral buffer is sized using a worst-case scenario of interest rate hikes.
By providing a collateral buffer to support changes in underlying asset values, USDM holders can be ensured that their USDM will be available for redemption at par, even in a rate hike scenario.
To minimize exposure to assets other than US Treasuries, the company does not keep a portion of "USDM Reserves" in the form of USDC for redemption, nor does it keep cash in transactional banks.
This way, USDM holders are protected from potential USDC depegs and potential future bank failures.
Instead, the company provides liquidity by securing multiple OTC USDC-denominated lines of credit, collateralized by USDM Reserves. Such facility provides "advances" to users in the form of USDC, which are then re-paid by the USDM Reserves when markets open.
This setup allows users to be comfortable that during black-swan events, USDM Reserves are always fully backing their USDM.
Note that in rare occurrences, financial partners might pause operations.
Mountain Protocol might also pause purchasing and redeeming USDM with affected payment channels, to protect the quality of USDM Reserves.
The company issues monthly reserve attestations by a licensed accounting firm, as a way to provide transparency to users on the existence and composition of "USDM Reserves".