| Warehouse receipts are a crucial element for risk | | | | Exchange-nominated warehouses. |
| mitigation, enabling a financier to lend to a borrower, | | | | The main advantages of warehouse receipt financing |
| who wants to finance the shipment of commodities | | | | from a risk management perspective are: |
| for sale or purchase. Using warehouse receipt finance, | | | | The identity of the collateral is less contestable and |
| a bank, or trader, relies on goods in an independently | | | | the intention of the borrower to pledge it is clear, |
| controlled warehouse to secure financing. Usually | | | | avoiding ownership disputes and competing claims. |
| providing (among many things) there is an off-taker | | | | The collateral can be auctioned or sold promptly and |
| and that there are other forms of recourse (the | | | | at low cost if there is a loan default |
| borrower?s balance sheet for example) banks will | | | | A lender holding a warehouse receipt can claim |
| lend against commodities stored in a reliable | | | | against the issuer (the warehouse company) as well |
| warehouse and which have been properly pledged to | | | | as the borrower in the event that the collateral goes |
| them in a sound legislative environment. So | | | | missing |
| warehouse receipts provide for a degree of physical | | | | In a bankruptcy scenario a document of title can cut |
| risk mitigation and, in support of an exchange-based | | | | off the claims of competing creditors. |
| trading system, they are important for underpinning | | | | Warehouse receipts can be negotiable or |
| futures. | | | | non-negotiable. A non-negotiable warehouse receipt is |
| Accordingly, warehouse operators can act as key | | | | made out to a specific party (a person or an |
| influencers of risk management. If they are able to | | | | institution). Only this party may authorize release of |
| issue warehouse receipts, which can be used as | | | | goods from the warehouse. He may also transfer or |
| collateral by banks, they may use this as a way of | | | | assign the goods to another party, for example a |
| encouraging deliverers of commodities to move | | | | bank. The warehouse company must be so notified |
| stocks into their facilities. Warehouse operators | | | | by the transferor before the transfer or assignment |
| receive goods into the warehouse and issue | | | | becomes effective. |
| ?receipts? showing the goods have been received | | | | The non-negotiable warehouse receipt in itself does |
| into the store. Among other things, the receipts | | | | not convey title and, if it is in the name of, for |
| themselves contain information about the quality and | | | | example, a trading firm, it needs to be issued in the |
| type of the commodity taken into store. The | | | | name of or transferred to the bank in order for the |
| receipts are for the information of the depositor of | | | | bank to obtain more than just a security interest. A |
| the goods or, if he is a borrower, for his bank. | | | | security interest is much less attractive to a bank |
| However, these receipts are not negotiable | | | | than if it has what is called possessory collateral, i.e. it |
| documents of title, i.e. the title to the goods | | | | has direct recourse to the warehouse where the |
| themselves may not transfer from one to another | | | | goods are stored and in the event of a default or |
| person via the passing of the related warehouse | | | | similar, it is easy for the bank to sell the commodities |
| receipt. | | | | in a shorter time frame. |
| Herein lies the potential for some degree of | | | | Issuers of non-negotiable warehouse receipts include |
| confusion. The term ?warehouse receipt? means | | | | collateral managers. They are becoming increasingly |
| different things to different groups of people around | | | | important, with companies like ACE, Cotecna, Control |
| the planet. For example, in the United States, the | | | | Union, Drum and SGS rolling out collateral |
| term ?warehouse receipt? is used for a document | | | | management products to serve a growing |
| evidencing storage of a commodity in a warehouse. | | | | international market. Notwithstanding the fact that |
| Unlike elsewhere, it is a document of title, supported | | | | most bankers, borrowers and warehousemen say |
| by legislation; in this case the US Warehouse Receipts | | | | they find collateral management ?just too expensive? |
| Act of 2000, which replaced a piece of legislation | | | | their desire to use the services of collateral |
| enacted in the US in 1916. By contrast, in the United | | | | management companies is increasing. In the absence |
| Kingdom a warehouse receipt is a non-negotiable | | | | of totally secure physical commodity storage facilities |
| instrument simply notifying that at a certain moment | | | | and resulting from the risks in moving commodities |
| in time a certain amount and quality of a commodity | | | | about, banks are obliged to find other structures for |
| was delivered into a warehouse. In the UK, a | | | | protection against physical risks. The collateral |
| negotiable form is represented by a warehouse | | | | management agreement, or CMA, offered by a |
| ?warrant? of the type issued by London Metal | | | | number of global firms, offers one such solution. |