Warehouse Receipts vs. Shipping Certificates

  • 4 Apr 2018
  • By CME Group

Both warehouse receipts and shipping certificates are instruments used for deliveries against futures contracts. A warehouse receipt represents ownership of actual physical grain in an Exchange approved warehouse. In contrast, a shipping certificate is   a negotiable instrument issued by an Exchange approved delivery facility and represents a commitment by the facility to deliver the underlying commodity to the certificate’s holder upon request. The Exchange’s Clearing House requires that all outstanding shipping certificates be collateralized in the form of cash, secure letters of credit naming the Exchange as its beneficiary, U.S. Treasuries, or USDA warehouse receipts. Such collateral, when held as cash, letters of credit, or U.S. Treasuries, must amount  to 110 percent of the relevant commodity’s current market value while collateral held as warehouse receipts must amount to  100 percent of the relevant commodity’s current market value.

With the recent change in the delivery instrument from warehouse receipts to shipping certificates in Kansas City HRW Wheat futures and upcoming change in Rough Rice futures, the Exchange is addressing some frequently asked questions about shipping certificates and warehouse receipts.

1. Does a change from a warehouse receipt to a shipping certificate expand the delivery territory?

As before, only Exchange approved warehouses within the defined delivery territory may register and deliver against futures contracts and all load-outs will still occur  at the approved delivery warehouse.

2. Does the location of load-out change with the conversion to shipping certificates?

Load-out is designated to occur at the approved warehouse that issued the shipping certificate. If a warehouse chose to store grain externally, it is the responsibility of that warehouse operator to transport such grain, which meet the contract’s quality specifications, into the approved warehouse that issued the certificate in time for load-out. However, an alternative load-out location can be arranged if both the buyer and  the seller agree to such a change. If there is no mutual agreement, load-out must occur at the issuing warehouse.

3. Can shipping certificates be issued by any facility?

Shipping certificates may only be issued by facilities inside the specified delivery territory that have been approved by the Exchange. All approved warehouses are listed at the back of Chapter 7 of the CBOT Rulebook.

Chapter 7 also includes all the requirements necessary for a warehouse to be approved to deliver against CBOT grain and oilseed futures contracts.

4. Do requirements for approved warehouses change when converting from warehouse receipts to shipping certificates?

For example, one requirement for approved Rough Rice warehouses is that they be licensed by the USDA. This requirement existed both prior to and after the conversion to shipping certificates, so the same federal scrutiny applies regardless of delivery instrument. The financial requirements for Rough Rice facilities also remains unchanged.

5. Does the load-out rate or approved capacity change with the conversion to shipping certificates?

The load-out rate and capacity requirements for approved warehouses does not change with the conversion to shipping certificates. Even though warehouses may hold grain outside the issuing warehouse, load-out rates and the maximum number of certificates that a warehouse may deliver against futures will continue to be dependent upon the storage capacity of the approved warehouse and not on any off-facility storage.

6. Are the financial assurances between warehouse receipts and a shipping certificates different?

The integrity of its agricultural markets is of utmost importance to the Exchange; therefore, the Exchange’s Clearing House helps ensure integrity by maintaining financial requirements for all approved warehouses.

The same financial requirements are present whether the delivery instrument is a warehouse receipt or a shipping certificate. The Exchange’s Clearing House also maintains a system of rigorous financial safeguards. More information on the Exchange’s financial safeguards can be found here.

7. Does holding a shipping certificate put me at a disadvantage in comparison to holding a warehouse receipt?

No. In fact, a shipping certificate holder can potentially be in a more secure position than a warehouse receipt holder. For outstanding shipping certificates collateralized with warehouse receipts, there is no change to the current risk profile. For shipping certificates not secured by  warehouse receipts, the approved warehouse issuer will  be required to post cash, letters of credit, or U.S. Treasuries equal to 110 percent of the relevant commodity’s current market value. There is no more default risk associated with shipping certificates than with warehouse receipts.

8. If there is a failure to load-out, will I always be made whole in physical grain?

There is no guarantee that the taker of delivery will be made whole in physical grain. This is true regardless of the delivery instrument. If an approved warehouse that has issued shipping certificates fails to load-out, when that certificate is backed by cash, letters of credit, or U.S. Treasuries, the Exchange’s Clearing House will ensure the financial performance of the warehouse’s delivery obligation through a taker’s clearing member. If the collateral is warehouse receipts, the buyer will be provided with USDA warehouse receipts just as today. Defaults on USDA warehouse receipts are handled by the USDA, and mitigation may be in the form of physical delivery or cash payment. Terms and responsibilities of warehouse operators and the USDA are outlined in the WA-402 Licensing Agreement

9. Is the risk of load-out failure greater with shipping certificates compared to warehouse receipts?

Due to rigorous financial requirements and the Exchange’s robust Market Regulation oversight, the risk of a load-out failure is well-mitigated. Furthermore, the Exchange expects most shipping certificates delivered against Rough Rice futures to be collateralized with USDA warehouse receipts, in which case there would be no load-out risk differences between certificates and receipts. Significant penalties would await any warehouse unable to complete a required load-out regardless of a futures contract’s delivery instrument.

10. Will this conversion create issues with USDA’s marketing loans?

No. All cash market activities that currently involve USDA warehouse receipts will continue as before.

11. Shipping certificates and warehouse receipts seem so similar; why is it important to convert to shipping certificates?

There are several benefits when switching from warehouse receipts to shipping certificates. First, additional efficiencies are created because storage pays and collects are automatic within the Exchange’s Delivery system. FCM back offices will no longer need to manually calculate and pay/collect storage. Second, warehousemen are given increased flexibility when it comes to managing outstanding deliveries at their facilities. They can move around grain and make space available for either cash orders or futures delivery.

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