EAC for warehousing chain coordination via regulator representation

The Prime Minister’s Economic Advisory Council has recommended cross-representation of the Forward Markets Commission (FMC), the Bureau of Indian Standards (BIS) and the newly formed Warehousing Development and Regulatory Authority (WDRA) on each others’ boards.

This is for better coordination among the regulators involved in the entire chain of warehousing and warehousing receipts, its tradability and delivery. And, to address disputes arising among end-users involved in the chain.

A highly placed official said WDRA would be responsible for regulation and registration of warehouses, issuing negotiable warehouse receipts which ensure scientific storage of goods, to be delivered at expiry of receipts. The receipt representing goods stored in warehouses will be traded on exchanges regulated by FMC. These receipts, to be eligible for trading, should represent universally accepted quality parameters of the goods to be delivered on expiry of receipts. These parameters of the processes and infrastructure involved in supply and storage of goods will be worked out by BIS.

So, having representation on each others’ boards would facilitate development of warehouse receipts and their tradability, since WDRA could draw upon the expertise of FMC and BIS in setting up quality parameters for goods and specification of receipt for trading. Warehouses play an important role in commodities futures, as most trades are settled with delivery.

That is, if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. A warehousing system and warehouse receipts act as the chain, connecting farmers with the futures market and credit financing.

A warehouse receipt is a document that provides proof of ownership of commodities (e.g., rice or wheat or bars of copper) e stored in a warehouse, vault or depository for safekeeping. Negotiable warehouse receipts allow transfer of ownership of that commodity without having to deliver the physical commodity. These receipts are also used as collateral for loans for bank financing. It may also show transfer of ownership for immediate delivery or for delivery at a future date

Rather than delivering the actual commodity, negotiable warehouse receipts are used to settle expiring futures’ contracts. Their usage for futures’ trading thus helps in curbing wastage, especially in agricultural commodities, since the goods are not moved.