July 26, 2013
I am responsible for overnight investments for Novelis, the world's largest rolled aluminum manufacturing company.
We invest our excess cash in Prime Money Funds, and we do so because the funds have a high level of transparency, a proven history of providing safe investment via quality counterparty diversification, with the highest level of liquidity.
Given the recent rate environment, our sole purpose of investing in Prime Funds is to protect Novelis assets with a diversified investment product. Bank CDs and similar instruments, while belonging in a diversified portfolio, do not provide the same levels of counterparty risk diversification or liquidity as prime funds.
My position on the reform suggestions under review is that either the floating NAV or the fees and gates will result in Novelis discontinuing use of Prime Money Funds.
In my opinion, the floating NAV will:
Encourage redemptions when the NAV is in the money, promoting speculation
Result in additional burden to tax and accounting departments to deal with daily gains and losses
Change the nature of a money market security from a cash equivalent to an instrument with more of a speculative nature
The Fee and Gate proposal will:
Seriously bring into question one of the greatest strengths of a Prime MMF – liquidity
A fund who imposes a fee or withholds redemption would sink faster than a fund that breaks the buck under current regulations, which means the tool for the funds would be ineffective
Cause runs on funds when news events about an issuer would cause holders to quickly sell their shares before everyone else does, trying to avoid the gate and or fee. In the current world, news events about individual issuers doesn't cause the level of panic that will be present when gates close and fees are imposed.
All of this boils down to the axiom that theres no such thing as a risk proof investment. There never was, and there never will be.
The proposed changes by the FSOC/SEC will do nothing to change this – the proposals increase costs, and shift the timing of runs on money funds as a competitive advantage to those who can stay in front of crisis. Since there will be those, like my company, that will no longer participate, funds will be smaller on an ongoing basis, so it will be more likely that redemptions will push funds into a crisis position.
My only hope is that you listen to me and people like me that routinely invest overnight cash and understand the risk reward profile of those investments.
The measures you are considering will be a self-fulfilling to ensure the failure of the money fund industry, or best case scenario, making it weaker than it is prior to the regulations.
Dont act for the sake of acting alone.
Manager Global Treasury
3560 Lenox Road, Suite 2000
Atlanta, Georgia 30326
[email address redacted]
Not just aluminum, Novelis Aluminum.