Best tips for risk management


About Warehouse Receipts Finance

Warehouse receipts are a crucial element forThe identity of the collateral is less
risk mitigation, enabling a financier to lendcontestable and the intention of the borrower
to a borrower, who wants to finance theto 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 independentlyThe 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) theredefault
is an off-taker and that there are other
forms of recourse (the borrower?s balanceA lender holding a warehouse receipt can
sheet for example) banks will lend againstclaim against the issuer (the warehouse
commodities stored in a reliable warehousecompany) as well as the borrower in the event
and which have been properly pledged to themthat  the  collateral  goes  missing
in a sound legislative environment. So
warehouse receipts provide for a degree ofIn a bankruptcy scenario a document of title
physical risk mitigation and, in support ofcan cut off the claims of competing
an exchange-based trading system, they arecreditors.
important  for  underpinning  futures.
Warehouse receipts can be negotiable or
Accordingly, warehouse operators can act asnon-negotiable. A non-negotiable warehouse
key influencers of risk management. If theyreceipt is made out to a specific party (a
are able to issue warehouse receipts, whichperson or an institution). Only this party
can be used as collateral by banks, they maymay authorize release of goods from the
use this as a way of encouraging delivererswarehouse. He may also transfer or assign the
of commodities to move stocks into theirgoods to another party, for example a bank.
facilities. Warehouse operators receive goodsThe 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 theassignment  becomes  effective.
store. Among other things, the receipts
themselves contain information about theThe non-negotiable warehouse receipt in
quality and type of the commodity taken intoitself does not convey title and, if it is in
store. The receipts are for the informationthe name of, for example, a trading firm, it
of the depositor of the goods or, if he is aneeds to be issued in the name of or
borrower, for his bank. However, thesetransferred to the bank in order for the bank
receipts are not negotiable documents ofto obtain more than just a security interest.
title, i.e. the title to the goods themselvesA security interest is much less attractive
may not transfer from one to another personto a bank than if it has what is called
via the passing of the related warehousepossessory 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 ofsimilar, it is easy for the bank to sell the
confusion. The term ?warehouse receipt? meanscommodities  in  a  shorter  time  frame.
different things to different groups of
people around the planet. For example, in theIssuers of non-negotiable warehouse receipts
United States, the term ?warehouse receipt?include collateral managers. They are
is used for a document evidencing storage ofbecoming increasingly important, with
a commodity in a warehouse. Unlike elsewhere,companies like ACE, Cotecna, Control Union,
it is a document of title, supported byDrum and SGS rolling out collateral
legislation; in this case the US Warehousemanagement products to serve a growing
Receipts Act of 2000, which replaced a pieceinternational market. Notwithstanding the
of legislation enacted in the US in 1916. Byfact that most bankers, borrowers and
contrast, in the United Kingdom a warehousewarehousemen say they find collateral
receipt is a non-negotiable instrument simplymanagement ?just too expensive? their desire
notifying that at a certain moment in time ato use the services of collateral management
certain amount and quality of a commodity wascompanies is increasing. In the absence of
delivered into a warehouse. In the UK, atotally secure physical commodity storage
negotiable form is represented by a warehousefacilities and resulting from the risks in
?warrant? of the type issued by London Metalmoving commodities about, banks are obliged
Exchange-nominated  warehouses.to find other structures for protection
against physical risks. The collateral
The main advantages of warehouse receiptmanagement agreement, or CMA, offered by a
financing from a risk management perspectivenumber of global firms, offers one such
are:solution.



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