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