WAREHOUSE RECEIPT SYSTEMS

FAQs

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.

• 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 with the company appointed; and
• Depositors (farmer groups and traders) will be trained to enable delivery of quality commodities so as to minimise the risk of crop rejection at the warehouse.

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 will be instituted:

• The Warehouse Receipts issued under the programme will be standardised, containing standard terms and conditions, and design features to ensure reduction in fraudulent receipts;
• Scales and grading equipment will be assized or calibrated regularly;
• Systems for issuing receipts that allow a clear audit trail will be established and access by unauthorised parties will minimised; and
• A system for verification of Warehouse Receipts will be 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 proposed:

• Maintain a market information system which will keep key players well informed about price movements and other significant market developments, and on time;
• Bankers will 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 would be encouraged to institute systems to monitor the link between market value and book value of the advances provided; and for
• Banks would be 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 market exist, their existence minimises the risk that collateralised commodity can not be sold and makes it unnecessary for off-take contracts to be a requirement for financing against the coffee receipts. Banks can be further protected against default risk by a system under which Commodity Bodies route payments for collateralised coffee 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 will form part of the planned training for bankers.

Fraudulent Release of Collateralised Stock

Q. How is fraudulent release risk mitigated?

A. To avoid unauthorised release of collateralised stocks, it will be 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 a negotiable WRS is being promoted under the Project.