The Use of Warehouse Receipts to Assure Title, Control and Value of Commodity Collateral

1
The Use of Warehouse Receipts to Assure Title,
Control and Value of Commodity Collateral

• Partners for Development--Lyon, France--9-12
  October 1998

2
The Importance of Warehouse Receipts

• The Worlds Oldest Form of Capital Formation
• Grain Receipts in the Code of Hammurabi (13th
  Century BC)
• Gold Receipts the earliest form of English Paper
  Currency
• Storage Bills the earliest form of tradable
  Commercial Paper
• Sugar Warehouse Receipts and LME warrants are
  still the only form of Developing Country
  Securities freely tradable for full value on
  International Commodity Exchanges

3
Warehouse Receipts are a Monetary Substitute in
any Society with an Undeveloped Financial
Infrastructure

• When Banks and Currencies are Unreliable and
  Credit is Limited, Goods are the Sole Reliable
  Unit of Trade Investment, but
• Warehouse Receipts, like money, are only valuable
  if.
• The Issuance of Warehouse Receipts is controlled
• The rights of the holders are clear and easily
  realised
• The goods covered by warehouse receipts have
  intrinsic value and
• There is minimum governmental interference in
  either the rights of holders or the value of the
  warehoused goods.

4
What are the Consequences of a Lack of Reliable
Warehouse Receipts?

• No Agrarian Society can Prosper
• No Farm Credit System can Develop
• Government Intervention cannot be avoided in
  order to maintain small farmers, but must
  ultimately fail due to the enormous costs
• The possibilites for external financing are
  vastly reduced
• The possibilites for commodity risk management
  are vastly reduced
• The possibilites for the development of local
  markets are vastly reduced, resulting in enormous
  waste

5
A Modern Example of Warehouse Receipt Reform

• One Legal and Financial System has Undergone More
  Concentrated Scrutiny and Reform during the past
  eight years than doubtless any other in the
  History of the World. The result is the new Civil
  Code of the Russian Federation, which was written
  in two parts between 1994 and 1996, and is a
  combination of German Law, Roman Civil Law,
  Common Law and and US Commercial and Constitution
  Law concepts.
• The effort has been to create a workable
  financial system to accommodate the needs of a
  country which is not unlike many developing
  countries. Russia had, in 1989
• A largely rural and agrarian population
• and undeveloped and largely irrelevant domestic
  banking system.

6
Classifications of Warehouses and Warehouse
Documents under the Russian Civil Code

• Double Warehouse Certificates (CC 913)
• Simple Warehouse Certificates (CC 917)
• Warehouse Receipts (CC 912)
• Public and Private Warehouses (CC 908)
• Customs Bonded Warehouses (Customs Committee
  Orders 314 and 18)

7
Utility of Warehouse Receipts in Import and
Export Financing Transactions

• Warehouse Receipts are Securities under Russian
  Law (CC 912)
• Absolute Cut-Off of Third Party Claims (CC 302
  (3))
• Collateral Easily Liquidated (Delivery of
  Document and endorsement CC 146)
• Collateral Easily Insured and Controlled

8
Negotiability of Warehouse Documents

• Double Warehouse Certificates are transferred by
  endorsement
• Single Warehouse Certificates are transferred by
  delivery
• Warehouse Receipts are not negotiable but the
  rights of the depositor may be assigned
• Any company may issue warehouse receipts as long
  as they are in the prescribed form
• Field Warehousing is authorised under Russian
  warehousing regulations.

9
Advantages in comparison to other Security Devices

• Simple Warehouse Certificates are Bearer
  Securities--Absolute Bar to Third Party Claims
• Loans and Security Easily Transferred by
  Endorsement
• Warehouse Certificates can be used to Create
  Eligible Bankers Acceptances under Federal
  Reserve and Bank of England Regulations (no
  reserve requirements)

10
Advantages (Continued)

• Warehouses can easily be customs bonded on a
  temporary basis to delay payment of import duties
  and VAT
• Russian insurance companies can insure warehouses
  in US dollars and pay claims offshore free of
  exhange controls

11
Advantages (Continued)

• Collateral may be sold by non-judicial sale (CC
  349 (2))
• Certain types of warehouse operators are subject
  to government supervision (oil and gas tank farms
  and pipelines) and the scope for warehouse
  licensing is expanding (RF Decision 02-94 (April
  24, 1994)

12
Tangible Project Applications

• Well-known international companies are investing
  in Russian port and inland warehouse facilities.
• Port financing of Export Commodities is now
  common.

13
Tangible Projects (Continued)

• Russia is a substantial exporter of certain soft
  commodities such as rye, barley and tobacco and
  of precious metals which are customarly
  warehoused prior to export.
• The devalued rouble means more leveraged import
  transactions. All of these commodites are heavily
  taxed and can rarely be prepaid in bulk. Bonded
  warehousing is an obvious financing solution and
  cost effective.

14
Funding Advantages

• The U.S. bankers acceptance and U.K. Acceptance
  markets are each huge sources of highly efficient
  liquidity and warehouse receipts are one means of
  fulfilling eligibility requirements
• Secured loans using double warehouse receipts are
  easily transferred by endorsement.

15
Making full use of local bank investments and
relationships

• Secured financing is labor intensive, but safe
  and profitable when managed diligently
• Local banks, particularly in the agricultural
  areas and ports, can provide useful guidance and
  support
• Until the capital markets work develops, why not
  create market share in certain product areas?

16
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