A key feature of RateSetter is that it is the people in our market – not committees or banks – that set the interest rates. We believe allowing rates to be set by supply and demand results in natural equilibrium that works for both lenders and borrowers. Today we are announcing what we hope is a simple improvement to the rate-setting process.
You don’t need to do anything but we thought you might be interested to understand how we are developing the “Market Rate” to make it clearer and more representative of the transactions RateSetters make on the platform.
How do we currently calculate the "Market Rate"?
The “Market Rate” is the rate at which lenders re-invest when they choose “At Market Rate” in their reinvestment settings. Currently this is calculated as follows:
The Market Rate is automatically calculated in each market every day. The rate is set at the level of the Lowest Lender Order, after discounting a small percentage (typically set at 1%) of all the offers by volume. This is done to ensure that the Market Rate is not adversely affected by outlying orders. The Lender’s repayment is then submitted to the market as an order. If the order is not matched on that day, it will be updated to the next day’s Market Rate should it be lower.
How is the "Market Rate" changing?
From 24th June 2015, it will be calculated as:
The weighted average of all the rates transacted during the previous day between 6am and 10pm.
The purpose of this change is to make the “Market Rate” simpler, based on actual transactions as opposed to quotes. We hope this makes it easy to understand and transparent. In due course, as the RateSetter market becomes even higher volume and even more liquid, it might make sense to tighten the sample period but for now we felt a 16 hour period was sensible. The latest “Market Rate” is always the one published on the RateSetter website.
Change to “Your Rate”
At the same time, “Your Rate” will become exactly that – those lenders who choose to re-invest at “Your Rate” will have their funds put on the market at that rate, with no other change made.
Marketplaces are fascinating things in their ability to discover a natural price and we continue to invest to make RateSetter a first-class, modern marketplace that serves its customers well.