Some generic WRS frequently asked questions are
answered below. For more information please contact us.
Storage losses
Q. What measures are required to be instituted
to minimise storage losses, through for example, deterioration of
the quality of the commodity stored, theft or destruction by fire
and allied perils?
A. To minimise storage losses, warehouse operator
will be authorised to receipt commodities under the pilot only if
they comply with the following requirements:
Meet minimum physical standards;
Have warehouse personnel who have been trained
and certified by the relevant commodity body;
Warehouse operator has capacity to enforce commodity
standards – having required grading equipment and skilled
personnel; and
has risk insurance cover required.
Monitoring and stock inspection
Q. What measures have been instituted to ensure
effective inspection and monitoring of warehouses and receipted
stocks under the project?
A. To ensure effective inspection and monitoring
of warehouses and receipted stocks under the project, the following
measures have been instituted:
Well defined responsibilities of the warehouses
as well as collateral managers appointed to monitor and inspect
the operations of the warehouses;
Consultation with the banks when appointing
collateral managers as inspectors to ensure that the banking community
has confidence in the company appointed; and
Depositors (farmer groups and traders)
are trained to be able to deliver commodities with quality
that stores well.
Fraudulent issue of WR
Q. How is the risk of fraudulent issue of warehouse
receipts minimised?
A. To minimise the risk of warehouse receipts being
issued that do not represent commodities delivered and/or situations
where depositors are cheated on weight or quality in receipting
their crop, the following measures are instituted:
The Warehouse Receipts issued under the programme
are standardised, containing standard terms and conditions,
and with security features to reduce the risk of fraud;
Scales and grading equipment are assized
or calibrated regularly;
Systems for issuing receipts that allow a clear
audit trail are established to avoid access by unauthorised parties; and
A system for verification of Warehouse
Receipts is instituted, especially by the financing banks.
Price and valuation risks
Q. How can depositors and holders of warehouse
receipts minimise price risk?
A. Without price risk management instruments in
place, both depositors and lenders are exposed to this risk. For
this reason the following is advised:
Maintain a market information system which will
keep key players well informed about price movements and other
significant market developments;
Bankers can adopt margining or “hair
cutting”, where credit provided represents a pre-determined
proportion of the market value of the crop. Currently, the advance
rate is between 70% and 80% of the market value.
Banks are encouraged to institute systems
to monitor the link between market value and book value of the
advances provided; and
Banks are advised to include in financing
contracts, exit clauses allowing for the bank to arrange sale
of the underlying commodity if they are overly exposed.
Marketing risk
Q. How can depositors and warehouse receipt
holders mitigate marketing risks?
A. Where auction markets exist, they minimise the
risk that a collateralised commodity can not be sold and make it
unnecessary for off-take contracts to be a requirement for financing.
Banks can be further protected against default risk by a system
under which exchanges or auctions route payments for collateralised
stocks through the accounts of the financing bank. Banks, however,
need to be encouraged to constantly monitor developments on the
auction market and to advise their clients as appropriate. This
forms part of the training for bankers.
Fraudulent release of collateralised stock
Q. How is fraudulent release risk mitigated?
A. To avoid unauthorised release of collateralised
stocks, it is required that:
All financed Warehouse Receipts are lodged with
the lenders and released on the basis of the payment versus delivery
principle (where without full settlement of the loan advanced
the WR is not released by the lender).
The warehouses will deliver the collateralised
crop only upon presentation of the original WR and release instructions
from the lender.
Enforceability of rights to delivery
Q. What happens if the right of a third party
(lender or buyer) to take delivery of the receipted commodity is
contested because of pre-existing financial obligations on which
the depositor has defaulted?
A. When Warehouse Receipts are not recognised as
documents of title, the rights of parties to whom the Warehouse
Receipt is transferred to take delivery of the underlying commodity
can be contested if there are any prior encumbrances. It is to mitigate
this problem that legislation supporting the development of negotiable
WRS has been promoted under the Project.