Warehouse receipts are a crucial element of risk mitigation as they allow a financier to lend to a borrower who wishes to finance the shipment of commodities for sale or purchase. By using warehouse receipt financing, a bank or merchant relies on assets in an independently controlled warehouse to secure financing. In general, as long as (among many things) there is a buyer and there are other forms of recourse (the borrower’s balance, for example), banks will lend against goods that are stored in a reliable warehouse and have been properly promised to them at a later date. strong legislative environment. Thus, Depository Receipts provide a degree of physical risk mitigation and, in support of an exchange-based trading system, are important in supporting futures.
Consequently, warehouse operators can act as key influencers in risk management. If they can issue warehouse receipts, which banks can use as collateral, they can use this as a way to encourage commodity deliverers to move stock to their premises. Warehouse operators receive merchandise at the warehouse and issue receipts showing that the merchandise has been received at the store. Among other things, the receipts themselves contain information about the quality and type of merchandise stored. The receipts are for the information of the depositor of the goods or, if you are a borrower, for your bank. However, these receipts are not negotiable documents of title, meaning title to the property itself cannot be transferred from one person to another through the related warehouse receipt.
Herein lies the possibility of some degree of confusion. The term warehouse receipt means different things to different groups of people across the planet. For example, in the United States, the term ?warehouse receipt? it is used for a document that proves the storage of a commodity in a warehouse. Unlike other places, it is a document of title, backed by legislation; in this case, the US Warehouse Receipt Act of 2000, which superseded a law enacted in the US in 1916. By contrast, in the UK a warehouse receipt is a non-negotiable instrument that simply notifies that at a given time a certain quantity and quality of a product was delivered to a warehouse. In the United Kingdom, a negotiable form is represented by a deposit order of the type issued by the designated depositories of the London Metal Exchange.
The main advantages of warehouse receipt financing from a risk management perspective are:
The identity of the collateral is less questionable and the borrower’s intent to pledge it is clear, avoiding ownership disputes and conflicting claims. Collateral can be auctioned or sold quickly and cheaply if a loan is in default. A lender with an escrow receipt can claim against the issuer (the escrow company) as well as the borrower in the event collateral is lost. In a bankruptcy setting, a document of title can cut off the claims of competing creditors.
Warehouse receipts can be negotiable or non-negotiable. A non-negotiable depository receipt is made in the name of a specific party (a person or an institution). Only this party can authorize the departure of the goods from the warehouse. You can also transfer or assign the property to another party, for example a bank. The depositary company must be notified by the transferor before the transfer or assignment takes effect.
The non-negotiable depository receipt itself does not confer title and, if it is held in the name of, say, a commercial company, it must be issued in the name of, or transferred to, the bank in order for the bank to earn more than a security interest. A real guarantee is much less attractive for a bank than if it has what is called possessory guarantee, that is, it has direct recourse to the warehouse where the assets are stored and, in the event of default or the like, it is easy for the bank to sell the products basics in a shorter period of time.
Non-marketable depository receipt issuers include collateral managers. They are becoming increasingly important, with companies such as ACE, Cotecna, Control Union, Drum and SGS launching collateral management products to serve a growing international market. Despite the fact that most bankers, borrowers and stockists say collateral management is too expensive for them. their desire to use the services of collateral management companies is increasing. In the absence of fully secure physical commodity storage facilities and as a result of risks in the movement of commodities, banks are forced to find other structures for protection against physical risks. The collateral management agreement, or CMA, offered by several global companies, offers one such solution.