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Post by wildlife2 on Feb 15, 2016 13:36:33 GMT
I never knew there was a TSB branch in Pogles Wood.
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Post by westonkevRS on Feb 15, 2016 16:11:04 GMT
And as if by magic, a blog post is on the RateSetter web site on where the Provision Fund is invested. You'd almost think we listen and respond to what forumites ask here..... www.ratesetter.com/blog/article/how-the-provision-fund-invests-its-cash" How the Provision Fund invests its cash
Some investors have asked us what happens to the £17m+ that is held by the Provision Fund, so in line with our commitment to transparency we’d like to shine some light on this area.
Given that the money in the Provision Fund must always be readily available to reimburse investors if a borrower misses a payment or defaults, our policy is to ensure that the money is held safely and in a liquid state. Obviously it would be impractical to keep such a large quantity of cash in a safe in our building. So instead the money is invested prudently with the objective of preserving the value of the capital while retaining a good level of access to the money. We do not seek to maximise returns.
The Provision Fund invests in assets which are considered to be very low risk. Most of these are UK bank accounts, fixed-term deposits with a maturity of less than six months, or money market funds with a rating of AAA or above. A proportion, currently 12%, is invested via an established fund manager with a low risk remit, with the objective of achieving a degree of diversification along with moderate capital growth.
The Provision Fund cannot invest in the equity of RateSetter (i.e. buy shares in it). However, a small proportion of the money in the Provision Fund can be used to provide temporary liquidity to the RateSetter market in order to bridge gaps between supply and demand for money, particularly in the case where a larger loan is approved. Less than 10% of the Provision Fund is currently used for this purpose. This liquidity is temporary – the cash must be returned to the Provision Fund within six months.
So in summary: c78% is held in bank deposits and money market funds, 12% is invested, and 10% is used to provide liquidity to the RateSetter market. We constantly monitor and evaluate performance against the investment policy and make adjustments to ensure compliance with it.
We hope that you find this information useful and we will keep you updated. " I hope this helps. Please don't ask specifically what broker or funds, that's probably a detail too far. The funds used to temporarily provide liquidity earns interest accordingly, and this is all added back into the fund. Kevin
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Post by bracknellboy on Feb 15, 2016 18:21:53 GMT
I'm not sure I'm entirely keen on the idea of a portion of the provision fund being used to provide liquidity. In the event of the provision fund being required 'in extremis' rather than as BAU, liquidity in RS will no doubt dry up and 10% of the fund would therefore be illiquid and be invested in the very thing that that has gone belly up. Also unless the rules on max / min etc. are 'written in stone' the parameters would seem to be entirely at the discretion of the trustee company, and if there is overlap been RS and the trustees it might be very tempting to increase the percentage used in this way right at the time that the fund might be most called upon (deteriorating conditions -> increase in defaults -> loss of lender appetite). Interesting.
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Post by Deleted on Feb 15, 2016 18:48:05 GMT
I'm not sure I'm entirely keen on the idea of a portion of the provision fund being used to provide liquidity. In the event of the provision fund being required 'in extremis' rather than as BAU, liquidity in RS will no doubt dry up and 10% of the fund would therefore be illiquid and be invested in the very thing that that has gone belly up. Also unless the rules on max / min etc. are 'written in stone' the parameters would seem to be entirely at the discretion of the trustee company, and if there is overlap been RS and the trustees it might be very tempting to increase the percentage used in this way right at the time that the fund might be most called upon (deteriorating conditions -> increase in defaults -> loss of lender appetite). Interesting. 100% agreed. I'm sure I've said the same in another thread somewhere. A correlation between the financial health of an insurer, and the event the insurer is supposed to be insuring against - this really is not a good idea. For what should be the quite obvious reasons in the above post. When the provision fund is needed to insure against increasing defaults, finding the fund itself has been hit by increasing defaults... not good.
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Post by pepperpot on Feb 15, 2016 19:35:00 GMT
It was the timescale that surprised me most, a week or two (month max) I think could be considered reasonable for short term liquidity as economic conditions can be reasonably foretold. However, 6 months sounds more like an investment. RS is using the funds essentially as an underwriter, something I was not aware of.
More house of cards than safe as houses.
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Post by Deleted on Feb 15, 2016 20:11:46 GMT
I think it has been said already by others, but to add my voice - I think the portion of the PF which is invested in RS markets should not be counted as part of the PF. Yep. It can't be considered insurance if it is invested in exactly the thing it is supposed to be insuring against default.
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teddy
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Post by teddy on Feb 15, 2016 20:36:15 GMT
So 10% of the PF's funds aren't actually part of the PF? And RS call this transparency? ! Why do I suddenly feel like I'm on the Titanic and all the lifeboats have already left?
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teddy
Posts: 214
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Post by teddy on Feb 15, 2016 20:37:07 GMT
I think it has been said already by others, but to add my voice - I think the portion of the PF which is invested in RS markets should not be counted as part of the PF. RS investments by their very nature are not in the very low risk category. I'm actually quite disappointed to read this blog post today and discover this structure. I'm not disappointed. I'm disgusted.
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Post by bracknellboy on Feb 15, 2016 20:53:48 GMT
100% agreed. I'm sure I've said the same in another thread somewhere. The concept was discussed in another thread when a forum member was suggesting that the PF should invest in RS loans in order to benefit from returns. I can't find and certainly don't recall whta you may have posted on the subject, but I can recall what I posted: which was that I considered the idea to be 'stark raving bonkers' and would seriously consider walking (or perhaps running) if that was to come to pass. I even recall westonkev as 'liking' my post on the subject. But here he is the messenger only. On the one hand I want to applaud the transperancy - but only so as not to shoot the messenger. If RS were doing this (as they are) i would have expected it to be splashed over the front page of any mention of the PF. And we have no idea whether the 10% is a sacresant upper limit. Nor whether RS is operating some 'sophisticated' modelling rules which would require it to start retreating from some actions if for example default levels started to rise beyond some level. On the other hand, experience should tell us that when it comes to financial 'instruments' the more 'sophisticated' the more likely to come completely off the rails under stress conditions. Not sure where this leaves me in my thinking in regard to RS at the moment. It does - for me - raise some significant questions.
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pip
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Post by pip on Feb 15, 2016 22:53:35 GMT
The investment in the ratesetter by the provision fund is crazy and has to stop. At the very least there has to be a set maximum or the whole idea of the provision fund breaks down.
I can see the scenario now:
a) ratesetter default rates go up b) lenders worry and monthly rollover of lending cannot be filled by borrowers c) the provision fund steps in and fulfills the rollover d) the default rate continues to rise e) ratesetter worries that it's sacred 0% customers lost money will go so hold off having resolution event f) the default rate continue to rise g) lenders sell out of the 1 3 and 5 year markets, not enough demand of borrowers so the provision fund steps in h) eventually ratesetter call a resolution event, but wait 80% of the money in the provision fund is invested in ratesetter! i) Remaining borrowers have a double whammy, they get a haircut to reflect the average default rate under the resolution event rules and also a haircut on the money in the provision fund as the provision fund will also be affected by the resolution event. j) As we know that shorter term borrowers will be paid out before longer term ones, the longer term borrowers will be lucky to get much if anything from the provision fund.
We urgently need three things in the provision fund to change:
i) No investing in ratesetter ii) Set rules for when a resolution event will be called and an independent body responsible for determining this. Ratesetter is not the right body to be calling a resolution event it has a vested interest in not calling one. iii) All lenders to be repaid on the same timescales in the event of a resolution event. You can't pool the loans but then repay some people before others, it makes no sense.
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Post by Deleted on Feb 15, 2016 23:19:45 GMT
Yep, this really is a big red flag from a risk management perspective.
The last few posts on this thread have nailed it - theres not much more to add.
In any kind of stress scenario, this correlation between the provision fund and the products it is supposed to be insuring is extremely poor practice. I hope RateSetter take heed.
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alender
Member of DD Central
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Post by alender on Feb 16, 2016 0:35:09 GMT
This has really disappointed and worried me, I believed the PF was there solely for the protection of investors not as has emerged a liquidity pool so RS can continue to fund longer term loans from short term funds knowing there is a buffer to keep things going for longer if/when problems occur. This seems to me to another tool used by RS to keep rates down with no regard to the increased risk to investors.
What is very worrying is there are no rules to prevent this and if/when things get desperate how much of this fund can be used in this way or in fact anyway that RS see fit. This fund should be held by independent body in the form of escrow funds and there should be hard rules preventing the use of this money in any P2P and should be held in only liquid very well protected funds like Treasury Bonds or accounts covered by the FSCS or perhaps an insurance.
I am also surprised (or at least I should be) that the FCA allows this type of practice; RS advertise the PF as added protection only to find that it is used in such a dangerous way. Also as RS call it a market for the rates but the very thing investors are lead to believe is protecting them is used to help keep rates down.
I cannot now think of this as PF but as pot of money to be used at the discretion of RS, this is not right!
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Post by westonkevRS on Feb 16, 2016 6:42:20 GMT
First, RS is investing up to 10% of the PF in the loan portfolio it's meant to protect, which is clearly going to very highly correlated in a systemic default scenario. You really cannot count such capital as being part of the PF. Wow, this blog has certainly caused some consternation. Yes I am the messenger of this blog, but personally I'm comfortable with the strategy. The investment in funds makes sense, even if correlated to the expected need of the fund. It's a marginal percentage to try and get a return (for the Provision Fund) greater than the minimal returns available on cash investments. Insurance firms don't have their surplus required for pay-outs in cash, it's almost fully invested. The 10% liquidity is I think causing the most concern. However this is process rather than investment. It makes the funding of larger loans much smoother, especially <=1 year property loans that cannot be funded easily from the markets. And I say process because if the loan defaults the Provison Fund will pay. It makes no difference if the loan is match initially by lenders or the fund itself, the risk is identical. This is not an investment into lending by the Provison Fund, it is a process. There is no change in risk, that's always on the Provisin Fund.Although we cannot predict the future, the short term requirements on the fund are relatively predictable. Certainly over the next 90 days within which we do know the default expectations. 6 months is a maximum. The Provision Fund is many things, but one thing it does have is liquidity. Kevin.
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Post by contangoandcash on Feb 16, 2016 7:52:06 GMT
The market place should be left to deal with large orders on it's own, it's really no business imo of the provision fund how long those take to get filled, if its big and squeezes liquidity or outstrips demand pushing rates higher, so be it, that's how markets work. Rates go higher, lenders (with confidence that the provision fund isn't correlated) then come in as rates climb because it is more attractive and equilibrium is once again restored. A large order should shift the market, that's how they work.
I really don't understand the need to tamper with markets, we see it in many other markets and eventually, an 'event' happens and lo and behold the entire system turns out to be correlated due to various interventions or gaping holes in liquidity are created at various price points.. It's not a recipe for confidence Kevin, the provision fund should be as far removed from RS markets as possible. My 2p... (now not reinvested, but into my holding account..)
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locutus
Member of DD Central
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Post by locutus on Feb 16, 2016 8:25:35 GMT
This one is the straw that breaks the camel's back for me. Whoever thought using PF money to provide liquidity on the terms stated is an idiot for all the reasons described earlier. It really is beyond belief and calls into question the judgement of the decision makers.
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