locutus
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Post by locutus on Feb 16, 2016 8:54:20 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. I have read through this response three times and it doesn't make any sense to me. It is full of platitudes and non sequiturs. There doesn't seem to be a single counterpoint to the very serious concerns raised.
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Post by propman on Feb 16, 2016 8:54:25 GMT
Sorry I have to agree that I am appalled that the PF is invested on the market. While I am a little confused at the legal status of the fund, if it is held on trust for the lenders, it should be employed for their benefit. The Law requires a specific mandate when any trust funds are invested in any but the most secure investments. Also, I imagine most investors who have thought about it would rather see rates increase for them than be used to hold them down when liquidity was an issue.
I am cynical about whether this started when the monthly market had liquidity issues with a higher value of borrower than lender offers. I explained to Rhydian, when I first started lending, that I was worried that monthly market liquidity issues might suck up the PF. He assured me that it would not be used in this way. Then the rules were made more explicit when RS formally acknowledged that the monthly and yearly money was at risk of not being repaid if there was insufficient liquidity. It now looks like they have done exactly what I first feared.
I can see why cash funds are used. FSCS has its limits for such a sum and short term gilts have often had negative nominal yields. I agree that there is some correlation on liquidity issues and that liquidity and defaults are also correlated, but there will always be some risk and general liquidity should be less correlated than P2P with itself. At least it wasn't in cash in the Hatton Garden Vaults!
It would be great to get a clear explanation of the extent to which the PF can be used to create liquidity and this written in to the terms of the PF mandate. Kev has let us know that some RS funds are used for this, it now turns out that it was not there funds, but those held for us. Explanation of the 6 month operation would also be appreciated as I understood that 6 month loans were rare and anything else would rely on the liquidity of shorter markets.
I have never liked the concept or workings of the resolution mechanism as I think it will create much expense and finish RS when some losses in another crisis would be acceptable to many and it might be possible to restart a second PF for the future with more conservative underwriting. I fear that the current resolution plan puts too much onus for RS to avoid it at all costs when I would have preferred an acknowledgement of losses and continuing (if at a lower level as people are forced to realise that P2P is not completely safe). - Propman
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alender
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Post by alender on Feb 16, 2016 10:05:20 GMT
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. It is not hard to know why, when lenders find that the Fund which is meant to protect them is partially being used by RS for to circumvent the normal running of a market to keep rates down to the lenders detriment.The PF will not pay if PF is depleted because some of the funds are tied up in loans when these type of loans are in default. The PF should be as it says on the tin a Provision Fund, used solely to protect lenders, not to help RS when there are liquidity issues.
If you can predict the future to 100% accuracy then this type of behaviour is acceptable otherwise it is dubious at best.
It has liquidity in a benign market, can you guarantee it will still be good if there is crisis, if not it should be kept 100% as a provision against bad times not 90% or some other number.
What is a major concern is that RS can dip into this fund when they like and if things get desperate who is to say more and more of this fund is used in way to keep RS going and not for the protection of lenders.
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pikestaff
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Post by pikestaff on Feb 16, 2016 10:09:41 GMT
Although it may not look good, it does not worry me one bit at present because:
1. 100% of credit risk is with the PF anyway. There is no loss of protection whatsoever. 2. The reduction in liquidity in the PF is not a concern, because a Resolution Event would be called long before losses got to a level that all of the PF's liquid investments had been used up. 3. I do not believe that investment at this level should materially affect the timing of payments to investors if there is a Resolution Event (which RS will be doing their level best to avoid in any event). 4. The loans so funded will be earning considerably more for the PF than alternative investments. Other things being equal, this will either help the PF to grow or keep down the spread between what borrowers pay and we receive. 5. Unlike some, I see the liquidity buffer being provided to the market as a positive.
I would like there to be a cap on the use of the PF and some rules about the maturity profile of the loans so funded, to ensure that 2 and 3 above are both true. Provided the maturity is not unduly weighted toward longer loans, I think the cap could be pretty high.
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Post by contangoandcash on Feb 16, 2016 10:15:50 GMT
The more I reread what Kev said the more incensed I get... so I'll stop. I know the standard line is - if you're not happy with the risk, then ratesetter is not for you... I would like to get 80% of my ratesetter funds out, but a quick check of my 5 year loans show that I'd have to pay over £3k in fees to sell out.
Edit - I'm by no means a skittish investor. I just don't agree with having the provision fund exposed to own markets.
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Post by propman on Feb 16, 2016 10:31:32 GMT
Although it may not look good, it does not worry me one bit at present because: 1. 100% of credit risk is with the PF anyway. There is no loss of protection whatsoever. 2. The reduction in liquidity in the PF is not a concern, because a Resolution Event would be called long before losses got to a level that all of the PF's liquid investments had been used up. 3. I do not believe that investment at this level should materially affect the timing of payments to investors if there is a Resolution Event (which RS will be doing their level best to avoid in any event). 4. The loans so funded will be earning considerably more for the PF than alternative investments. Other things being equal, this will either help the PF to grow or keep down the spread between what borrowers pay aand we receive. 5. Unlike some, I see the liquidity buffer being provided to the market as a positive. I would like there to be a cap on the use of the PF and some rules about the maturity profile of the loans so funded, to ensure that 2 and 3 above are both true. Provided the maturity is not unduly weighted toward longer loans, I think the cap could be pretty high. I disagree with you on 1. While if the loans are made, then I agree that the risk is the same, but it is shared amongst less external investors. However if liquidity is short, then perhaps less loans would have been made. This seems like creating money to me thereby gearing up the risk of the actual investors so I would not like to see it become a substantial amount.
The liquidity issue is real as a panic into P2P could cause a liquidity event and this would reduce the proportion of repayment that was received soon after the resolution event is called.
The extra interest is immaterial as it is the monthly rate and will presumably be reducing the borrowers contributions. I doubt the difference in fees to borrowers would make much difference. If it is being used to lend alongside higher interest loans from investors I could be happy as the higher rates (or larger volumes) achievable might compensate for the loss of the spikes that give the best rates.
I think the impact on the market of a short liquidity event would be positive as it would help ensure that investors are made aware of the potential risks.
- Propman
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registerme
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Post by registerme on Feb 16, 2016 10:39:12 GMT
I'm sorry I just can't see how this is acceptable. The mechanism is not so very different to that used by AC with their QAA fund, however that is explicitly not a provision fund. It might not be incorrect to label this a "process", but equally how is this different to a pension fund investing in the company that its members work for?
Provision funds are not (should not be!) there to provide liquidity or to smooth lending.
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pikestaff
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Post by pikestaff on Feb 16, 2016 10:40:27 GMT
...The liquidity issue is real as a panic into P2P could cause a liquidity event and this would reduce the proportion of repayment that was received soon after the resolution event is called... If a resolution event is called, everyone is locked in while the whole portfolio is realised. They may make interim payments at their discretion and I expect that they will. All payments must be pro rata to all investors from the whole portfolio. If the maturity profile of the loans funded by the PF is no longer than that of the portfolio as a whole (and the indications are that it is considerably shorter), the timing of payments to investors should not be affected. Where I agree with you is that it is gearing, but I think that's OK provided the level of the PF is set by reference to the gross amount lent. On the general subject of liquidity provided to the market, RS have always been open about the fact that they have access to 3rd party liquidity. If the PF subsitutes for 3rd party liquidity it reduces costs and I have no problem with that.
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alender
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Post by alender on Feb 16, 2016 12:56:46 GMT
On the general subject of liquidity provided to the market, RS have always been open about the fact that they have access to 3rd party liquidity. If the PF subsitutes for 3rd party liquidity it reduces costs and I have no problem with tha They may have been open to the fact that there is access to 3rd party liquidity but I did not realise that this included the PF which I believed was solely for the protection of investors not to help RS dig itself into a bigger hole when there is a crises. This will increase the risk to lenders and reduce the amount returned in the event of a collapse. Does anyone know how much of the PF is available to RS to do with it as it likes, is it 10% or are they just using 10% when things are good and could this increase as and when RS decided to dip deeper into this pot.
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Post by propman on Feb 16, 2016 13:09:44 GMT
...The liquidity issue is real as a panic into P2P could cause a liquidity event and this would reduce the proportion of repayment that was received soon after the resolution event is called... If a resolution event is called, everyone is locked in while the whole portfolio is realised. They may make interim payments at their discretion and I expect that they will. All payments must be pro rata to all investors from the whole portfolio. If the maturity profile of the loans funded by the PF is no longer than that of the portfolio as a whole (and the indications are that it is considerably shorter), the timing of payments to investors should not be affected. Where I agree with you is that it is gearing, but I think that's OK provided the level of the PF is set by reference to the gross amount lent. On the general subject of liquidity provided to the market, RS have always been open about the fact that they have access to 3rd party liquidity. If the PF subsitutes for 3rd party liquidity it reduces costs and I have no problem with that. While I agree that the timing of payments is at the discretion of the Trustees, I had (perhaps naively) assumed that a pro-rata payment would be made to lenders for the vast majority of the PF within a few months. This changes that, although not too materially so long as it remains only 10% of the PF (As it should be augmented by some repayments, the reduction should be less than 10%).
Personally I think it should be by reference to the amount outstanding to lenders covered by the PF. Gross amount lent might be thought to be the >£1m that will become less meaningful through time. I would also like to see a maximum proportion of the PF Fund.
I assumed that the 3rd party liquidity was institutional money that was available to be invested. RS has kept this relatively low to date and so I took this to mean that they had more demand that they could tap if required, perhaps accelerating the agreed proportion of the loanbook to be held by such investors.
On openness. The other area that they have not been very forthcoming on. Kev has made it clear that a very significant portion of the loans are at pre-agreed rates before they are matched with RS exposed to any difference between that offered and that receivable by the lenders. This is in addition to the shorter loans now being at fixed rate and so exposing RS to an "underwriting risk" if rates rise sharply. This provides significant platform risk in my opinion as I am unaware of any hedging made by the site. I would hate the PF to be used to provide cheaper funds to compensate for any such losses so would like to know how the rate is set.
- Propman
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pikestaff
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Post by pikestaff on Feb 16, 2016 13:58:49 GMT
...This will increase the risk to lenders and reduce the amount returned in the event of a collapse... Surely if the PF is calculated as a proportion of the total loans made, it makes no difference whatsoever to lenders' risk. Be that as it may, I think the most likely outcome, given the reaction on here, is that RS will change their policy. Which will make them less efficient and (at the margin) make everybody slightly worse off.
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Post by easteregg on Feb 16, 2016 14:20:53 GMT
To be fair to RateSetter I do remember reading a long time ago that a proportion of the provision fund would be used for liquidity in the monthly markets. It may be worth setting an upper limit so that lenders have some reassurance, but to be honest as a lender on RateSetter I'm not overly concerned by this. I would like to see the coverage ratio increase back towards 180% which it was back in April 2014 (blog.p2pmoney.co.uk/ratesetter-100-percent-fund).
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Post by p2plender on Feb 16, 2016 14:21:48 GMT
I must be too relaxed considering the reaction on here. I trust the people behind RS and I like the fact Westkev goes out of his way to help and contribute on here with investors. My opinion may of course change over time but for now I'm happy with RS.
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registerme
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Post by registerme on Feb 16, 2016 14:33:26 GMT
I like RS, and I certainly appreciate westonkevRS's efforts here on the forums, but that doesn't mean I am going to be uncritical of things about the platform / offering that I don't like or disagree with. RS, like all platforms, needs feedback, and will or won't alter their offering as a result. Ultimately it's a business decision for them and I respect that. Equally they will respect the fact that some lenders may not be comfortable with this or that aspect of the platform (and this isn't meant to single RS out, it applies equally to all other platforms). Those who are happy with the offering will stay and / or increase their exposure. Those who aren't will go, or decrease their exposure. It's that simple.
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Post by bracknellboy on Feb 16, 2016 14:35:50 GMT
...This will increase the risk to lenders and reduce the amount returned in the event of a collapse... Surely if the PF is calculated as a proportion of the total loans made, it makes no difference whatsoever to lenders' risk. Be that as it may, I think the most likely outcome, given the reaction on here, is that RS will change their policy. Which will make them less efficient and (at the margin) make everybody slightly worse off. I would hope that RS would not knee jerk in response to the immediate reaction on here. Better for them to justify first hand why this is a non-issue, and how or what 'rules' they may have in place with respect to proportion etc.
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