What is a Vault Receipt?
A vault receipt is a document used to indicate ownership of commodity stored in a bank, vault, depository, or warehouse and regularly used as a delivery mechanism in precious metals contracts. The receipt is collateralized to meet contract standards and can, therefore, be used to transfer precious metals, such as gold and silver, without their physical movement.
- A vault receipt is a simple contract between the owners of a vault and the owner of a precious metals commodity that binds the latter to hold and the former to pay consideration for safekeeping.
- The receipt is held by the broker, and unless its owner requests a copy, a physical copy cannot be given.
- A vault receipt provides all the essential information needed to complete a transaction, thereby contributing to the creation of fast and forward markets.
Understanding Vault Receipts
A vault receipt is used as documentation in futures markets as proof that precious metal commodities are safely stored in an approved facility by the owner. The key features of the receipt include the name of the owner of the stored commodities, the date, the quantity stored, reference number, any storage fees or other fees, and the condition of the commodity at the beginning of storage.
Approved facilities offer highly specialized services to protect the traders. The depository, warehouse, or vault strives to record and check the weight of the delivered metal commodity. The metal is analyzed, refined, and its weight is determined for satisfaction before issuing a vault receipt, which acts as a transfer document.
Vault Receipts and Futures Contracts
Some traders may require physical metal commodities, which can be drawn from the depository of the warehouse. Alternatively, the receipt can be transferred upon the maturity of the contract while the metal commodities are stored. While it facilitates delivery, the vault receipt can also be used in futures contracts.
Individual deliveries of metal commodities are seldomly matched with specific futures contracts, given the large volumes of trading on the exchanges. Such an approach reduces costly shipping charges and other fees.
In light of the future standardized contracts, the exchange may be used to settle a contract involving precious metals. Such a contract not only attracts a premium from the buyer but can also be used to settle other contracts due if the original one is canceled through offsetting or buyer’s default.
In practice, a vault receipt is held by the broker, and unless the owner of the receipt requests a copy, he is not issued with a physical copy. For most traders, precious metals are not physically removed as long as they are safely stored in the storage facility. Removing the metal bars from the exchange facility breaks their circle of integrity and loses the viability for trading through futures contracts.
In this regard, the owner of the precious metals can opt to either sell on their own or continue storing them. If the owners chose to remove the metal bars from the exchange vault and sell them via futures contracts, they are subjected to the refining process. A vault receipt is then re-issued once the metal is returned to the storage facility.
Other Uses of the Vault Receipt
Because vault receipts are negotiable instruments, they are important in financial systems and marketing of most industries. Notably, the vault receipt enhances the agribusiness sector, where readily tradable devices are converted from inventories of agricultural raw materials.
A vault receipt is used for four primary purposes with the relative importance of each role depending on the market condition, such as the size of the inventory, principally stock, or carryover stocks.
1. As a means of making collateral out of commercially stored crops;
2. As documentation for inventory containing government-owned grain;
3. As a document for delivery that is acceptable for trading on futures exchanges; and
4. As collateral for standardized nine-month loan programs that are guaranteed by the government.
Correctly structured vault receipts contribute to the creation of fast and forward markets, thereby enhancing competition. Since they provide all the essential information needed for a complete transaction, vault receipts facilitate the trading of commodities. It means that their availability reduces transaction costs and increases the volume of trade.
A transaction can either take place at the storage facility or inspection location, given that the buyer does not need to see the goods. Also, a transaction can take place in three ways – informally, through the exchange, or on a regulated market.
In either case, the vault receipt forms the background for the establishment of a forward market and supply chain in a commodity’s futures exchange. A broader economic benefit of the vault receipt is that it increases the confidence of market players, particularly those in the private sector.
Preconditions for Receipts Viability
For the vault receipt to be valid, key prep courses must be met within the economy it operates, including:
- Performance guarantees must be available to ensure the integrity of the system.
- The legal system must acknowledge pledge instruments as a means of securing collateral.
- The market operational conditions must be ideal for the creation of the vault receipt system.
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