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Post by westonkevRS on Feb 17, 2016 7:40:20 GMT
My question is: "Was the PF used to provide liquidity to the market when it was a Trust, or did this start after the change to a Limited company"?
Many thanks, Mark The Provision Fund, to my knowledge, was not used fund liquidity when the markets were depleted or to roll over monthly money. This was performed by RMM Ltd or through the help of large lenders and marketing campaigns. I expect this will continue. The new structure allows the fund to be used for liquidity, but the focus is in terms of funding new larger loans. Kevin.
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Post by westonkevRS on Feb 17, 2016 7:51:38 GMT
There are three things that I do not like about this situation. - The PF is not just a PF, so the level of protection is less than advertised.
- The PF is being used to manipulate the market in order to keep rates lower than the might otherwise be.
- The directors of the PF holding company are the same as RS. This is starting to look like a conflict of interest. I fail to see how using the PF funds in this way are consistent with the best interests of the PF.
The Provision Fund is exactly what it says. It just isn't 100% cash, which would be far from optimal. Any large pool of monies will always be invested in a variety of liquid assets covering cash, bonds and equity funds. 12% in equities is a very conservative portion and extremely liquid. The web page value is updated constantly to reflect the value across all investments. The investments are not for the benefit of RMM Ltd, all yield is put back into the fund to protect lenders. You might disagree with the investment approach, but never think it isn't done for anyone but the lenders benefit. Some will think 100% should be in cash, others will say 12% equities is far to conservative. It is not used to manipulate rates. If anything this will push rates upwards as we can make larger loans and compete, more borrower demand pushes lender rates up. This is true, currently all the directors of the new Provision Fund are the same as the previous trust. However previously they only had to pay out to lenders on defaulted loans at their discretion. Now they must, they have zero discretion.The trust rules were not strong, and the company structure now has firm rules and tolerances for fund use. However it is not ideal having the same Directors, hence the search for another Director as outlined in the original blog.Kevin.
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alender
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Post by alender on Feb 17, 2016 9:55:35 GMT
The impact on the lenders is zilch. If the loan defaults within the 90 days it will be depleted from the fund directly. If lenders had funded the loan from day zero they would be reimbursed by the Provision Fund post default. The net result either way is exactly the same and has no impact on lenders. In fact the Provision Fund gains from the short term interest, so the actual net result will always be marginally positive.There is nobody that cares more about the Provision Fund than me, and I am comfortable with this PROCESS. Kevin The points for me are: 1. The PF should be held arms length with legally binding rules that RS cannot use this fund for any purpose, it should be akin to a company pension fund, there are good reasons for this which also apply to RS. 2. If RS use the fund what can it use it for, not what it us used it for now but what is the legal position? 3. What is the legal maximum that RS can use from the Fund? For me this is very it is important, without knowing the answers to point 2 and 3 I have no idea if the PF will be able to function in a crisis situation. I am sure that in normal times the PF will function fine but that is not the point, it is how it functions in a crises and during these times people have a tendency to take desperate measures and if the PF is depleted it obviously will not function as intended.
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sl75
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Post by sl75 on Feb 17, 2016 10:04:09 GMT
sl75: surely that is just an argument for not having a provision fund. Or for having a smaller one.
The maths you quote is based on what happens after a resolution event when all the loans are placed in the PF. This is the end of the RS platform - exactly the risk that worries some of us. The value of the PF is to avoid this total meltdown. The total value of a solvent PF needs to be sufficient to cover ALL anticipated defaults from the current loan book. The defaults will actually emerge over the course of up to 5 years, so only a small proportion of the provision fund will ever be expected to be called upon within the space of a few weeks from "now" during normal operation. The only time any substantial proportion of the PF can be called upon within a short space of time is a resolution event (or the events that must necessarily trigger a resolution event due to the balance of the PF falling below the anticipated value of future claims).
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teddy
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Post by teddy on Feb 17, 2016 10:52:18 GMT
Kevin, if it came to pass that defaults were to rise to a level which was placing abnormal stress on the PF, would the PF continue to be used to fund these large loans if the money was available in it? If the bear poo were to hit the fan within the 90 day repayment period, things could go pear shaped very quickly.
Is the using of the PF to fund these loans an automatic computer decision, or is the decision taken at the highest level, and the funding done manually?
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toffeeboy
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Post by toffeeboy on Feb 17, 2016 12:50:41 GMT
I struggle to see what the problem is with using the PF to fund larger loans on RS. As Kev has said these loans would be very difficult to implement without the large funds available through the PF so if they don't use the PF then RS fees have to be increased across the board to allow for the extra costs which means less borrowers are attracted to RS.
Also as Kev says the loan would go ahead anyway just with a bit more work required so therefore if the loan was to fail then the PF would be picking up the tab for it anyway so what is the difference.
As I said before 10% is smaller than the excess held by the PF anyway so it isn't actually playing with the funds required for the the PF it is just getting the most from the excess funds htat are held so basically the same as every other lender on RS.
A lot of people seem to be scaremongering on here about this, the PF can not be used to buy RS shares so it isn't propping up RS it is merely investing less than 10% of its money in RS for 90 days maximum and getting a better return than if it was held elsewhere. They aren't manipulating the market, they are actually using the PF to help the market.
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toffeeboy
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Post by toffeeboy on Feb 17, 2016 12:55:19 GMT
Kevin, if it came to pass that defaults were to rise to a level which was placing abnormal stress on the PF, would the PF continue to be used to fund these large loans if the money was available in it? If the bear poo were to hit the fan within the 90 day repayment period, things could go pear shaped very quickly. Is the using of the PF to fund these loans an automatic computer decision, or is the decision taken at the highest level, and the funding done manually? It has already been said that less than 10% is invested in RS so if the poo hit the fan and the PF was stressed then 10% of the size of the fund would be reduced and therefore wouldn't be available. 90 days is more than enough time to see the market moving towards pear shaped status and the money recovered from the RS market place.
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Post by propman on Feb 17, 2016 13:06:28 GMT
I would be relieved if the PF could never been used to acquire undefaulted loans from investors.
I understand that (contrary to what I perceive to be the interests of investors or RS) in a resolution event this will happen.
I am somewhat concerned that you have not confirmed that the PF has not been used to roll over monthly loans and that the scheme rules do not prohibit this and would welcome such a change. I am a firm believer that risks are allowed to crystallise rather than be allowed to grow unreported and so a short liquidity event might not be welcomed by the RS marketing department, but it would help to ensure that the investors were aware of the potentially more significant risks and lessen any chance of a claim from them on a subsequent real loss succeeding (and therefore the likely loss if disaster strikes). I was very concerned when the monthly market offers exceeded the loan offers by >£2m at one point. In the event the new lending recognised in the period was modest. Either the loans were never completed, were purchased by RS or PF and only recognised later as new loans in the information pages &/or these were rollovers required that were matched with substantial additional funds not initially on the market (such as institutional funds) or by the PF or RS off its own balance sheet. I would very much like to understand which.
Sorry to add to the requests Kev when you are merely the volunteer doing your best. But any further info you can ascertain would be very gratefully received. As would a clarification on when the loans matched to the PF appear in the stats on recent lending of each duration. In addition, I would welcome any comments you are allowed to make on the mechanism of selling the loans back onto the market. Are these the source of much of the sub-market rate borrower requests or does the fund have a policy when it sells (perhaps based on excess offers over likely borrower demand, or reducing rates?). You also say that the PF benefits. Unless RS were to reimburse it, if the rates it agrees with the borrower turn out to be optimistic, the PF would need to sell at a loss that might well exceed the interest earned. Even if that has not been the case to date, the risk is that this is what would happen in a crisis.
Re your responses. With respect I don't think that your assessment of the impact of the liquidity operations on rates is at all certain. At one time spikes in rates on the one year market were very common as the result of large loans (in those days details were available in the docs and I had a small part of at least 3 very large property loans). The peak rates achievable as a result were much higher than at any other time, but the loans occurred (often helped by an influx of funds when the rate increased). I can accept that average rates from this might have increased due to increased demand (or perhaps more accurately reduced supply when offers are used to acquire the loan portions subsequently), but I suspect peak rates (the ones a high proportion of forum members aim for) have been reduced.
I look forward to your further comments.
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alender
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Post by alender on Feb 17, 2016 13:40:56 GMT
A lot of people seem to be scaremongering on here about this, the PF can not be used to buy RS shares so it isn't propping up RS it is merely investing less than 10% of its money in RS for 90 days maximum and getting a better return than if it was held elsewhere. They aren't manipulating the market, they are actually using the PF to help the market. One person’s scaremongering is another person’s concern. We also have to ask who this is helping one persons help can be another person’s loss. What I do know is: 1. At present up to 10% of the PF can/has been used to cover other areas that are not defaults. 2. The PF has/can be used to bridge large loans. 3. The PF has/can be used to plug liquidity gaps. What I don’t know is: 1. If the PF can be used for anything else that is not in the above. 2. What is the maximum part of the PF can be used by RS to other things than cover defaults. Until I find out answers to these I am very concerned about how useful the PF will be in a crisis. I am not interested in RS policy on this issue, I would like to know what the legal situation is. So far we have been given extra information but no facts on the legal position. You may trust RS but there are so many things that could happen. One is that RS owners could sell the company to anyone they chose and if there is no legal protection on PF will you trust the new owners as much as the current ones.
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Investboy
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Post by Investboy on Feb 17, 2016 13:49:00 GMT
... The 10% referred to in the blog is to fill new large loans. For example if there is a £1m loan (which is extreme in the RateSetter world, but quite possible) this is difficult to fund from the markets, and causes technical issues. ... Two questions then: 1. Why it is difficult to fund? Just offer a good rate and it will be gone in seconds. That proves what other said that PF working against lenders and lowers rates. 2. Why is it causing technical issues? The amount of the loan causes issues in your software... I'm beginning to worry
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spiral
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Post by spiral on Feb 17, 2016 14:46:45 GMT
1. Why it is difficult to fund? Just offer a good rate and it will be gone in seconds. Because more often than not, there isn't sufficient volume of funds sitting idle in the market place and if there is, it would take out all the double figure interest rates as well which would result in a rate too high and the loan subsequently wouldn't form. The problem with the second part is it is us that offer the rates but I won't transfer funds across on the pure speculation that there might be a million pound loan that needs funding that will wipe out the next few base points. It needs to be there or thereabouts first. I've often wondered why they don't offer interest (at or around instant access rates) for money on market. That would solve my issue of waiting for the right rate before transferring thus increasing liquidity on market. Maybe now with the change to the monthly market, they may be trying to address this issue by in essence, creating a holding account paying interest for money pending investment although it may also have the opposite effect of everyone having their payments diverted to monthly and cashing them in when the rates on the other markets are acceptable therefore reducing liquidity further on the 3/5 yr markets.
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toffeeboy
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Post by toffeeboy on Feb 17, 2016 15:25:24 GMT
A lot of people seem to be scaremongering on here about this, the PF can not be used to buy RS shares so it isn't propping up RS it is merely investing less than 10% of its money in RS for 90 days maximum and getting a better return than if it was held elsewhere. They aren't manipulating the market, they are actually using the PF to help the market. One person’s scaremongering is another person’s concern. We also have to ask who this is helping one persons help can be another person’s loss. What I do know is: 1. At present up to 10% of the PF can/has been used to cover other areas that are not defaults. 2. The PF has/can be used to bridge large loans. 3. The PF has/can be used to plug liquidity gaps. What I don’t know is: 1. If the PF can be used for anything else that is not in the above. 2. What is the maximum part of the PF can be used by RS to other things than cover defaults. Until I find out answers to these I am very concerned about how useful the PF will be in a crisis. I am not interested in RS policy on this issue, I would like to know what the legal situation is. So far we have been given extra information but no facts on the legal position. You may trust RS but there are so many things that could happen. One is that RS owners could sell the company to anyone they chose and if there is no legal protection on PF will you trust the new owners as much as the current ones. Just to altar what we do know: 1. At present less than 10% is invested for up to 90 days to increase the fund, another 12% is invested elsewhere as well. This money isn't used elsewhere it is invested rather than have it sit in an account not earning anything, if it is sat in a bank only £85,000 of it will be protected anyway. 2. The PF is used to fund large loans so they can be dripped into the market rather than wipe out all of the funding that is currently available on the market and cause rates to max out. 3. The PF isn't used to plug liquidity as explained by Kev in an earlier post, the use of the word liquidity was incorrect in the blog post. You are correct about what we don't know but then there is a lot that we don't know. But we do know that 78% of the PF is held in a liquid state so is imediately available which is more than enough to cover the predicted bad debts and if the bad debts are a lot higher then the 10% invested for 90 days won't make any difference anyway. You are confusing shareholders and directors, even if the shares are sold then the directors of the PF won't change. The shareholders of the company have no immediate control over the running of the company although I suspect that a few are both directors and shareholders from the guys that originally established the company. Furthermore your comment goes back to the start of this thread and that RS are looking for an independant director to head up the PF company that isn't involved wit hthe running of RS.
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adrianc
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Post by adrianc on Feb 17, 2016 15:27:56 GMT
Two questions then: 1. Why it is difficult to fund? Just offer a good rate and it will be gone in seconds. Right now, to mop up £1m on the five-year would require 6.7%. To mop up £1.2m would take the ENTIRE market, including 100%. To mop up £2m would take the entire three AND five year markets, including 100%. £2.7m would take all the one, three and five year markets. £3.7m would take all four markets. There is currently £17m in the PF - so if all 10% or £1.7m was needed for a biiiig loan, then that's pretty much the entirety of the money on three and five year markets gone. Say, all of five-year below 6.7% and all of three-year below about 5.7%. It'd leave shrapnel for all the routine business. THAT's why using the PF as a pressure vessel for the short term makes sense.
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Post by westonkevRS on Feb 17, 2016 16:16:45 GMT
The defaults will actually emerge over the course of up to 5 years, so only a small proportion of the provision fund will ever be expected to be called upon within the space of a few weeks from "now" during normal operation. Thank you sl75 , that's the point. The Provision Fund has excessive liquidity in the short term (i.e. up to 90 days), and so as long as the default risk is no higher for the lenders it makes no difference if it is used to initially fund larger loans. For this predictable short term period only. And to be clear, it is to a maximum of 10%. Hardly aggressive. Kevin.
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Post by westonkevRS on Feb 17, 2016 16:25:24 GMT
Two questions then: 1. Why it is difficult to fund? Just offer a good rate and it will be gone in seconds. That proves what other said that PF working against lenders and lowers rates. 2. Why is it causing technical issues? The amount of the loan causes issues in your software... Alas there isn't always enough money, e.g. £1m, to fund a large property deal. There usually is, but not always. If we are to compete with the larger players and not look like a bunch of amateurs, we have to be able to go to the market and guarantee funds are available. We can't offer a large loan to a borrower and then find the markets are too thin, that's just amateur. And the rate mechanism doesn't help because the money hasn't been attracted as it doesn't know about the loan. And we can't "place" the loan for x days to attract lenders, again that's just amateur. It has to be as and when the borrower needs to money. The market matching process was designed for loans of up to £25k, and copes well enough up to £100k. We tend to get "timing out" issues above that as described another thread. Kevin.
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