Commodity Financing Guarantee Legal Risks

With the promulgation of PRC Property Law on2007, globalization ofinternational trade, more complexity of structure of commodity trades and increasingof commodity trades, commodity structure trade finance plays more and moreimportant role in China financing market. China commercial banks also launchvarious commodity finance product for the development of commodity finance.However, commodity structure trade finance is still a new type of finance inChina, and there shall be a long way to perfect it. In this article, we start from thewarehouse receipt pledge to discuss how to improve the security mechanism. Thisarticle consists in four chapters.The first chapter introduces the definition of commodity and commoditystructure trade finance, which will bring a general conception of commodity finance.Based on the definitions, this chapter further introduces some types and issues ofcommodity finance in practice. And then, it brings out the topic, how to perfect thesecurity mechanism of commodity finance, by the way of comparing warehousereceipt pledge with goods pledge and chattel mortgage.The second chapter analyzes the risk of warehouse receipt finance, whichincludes the risk of fake warehouse receipt, warehouse receipt fraud, unclearobligation of collateral companies, no formal authorization of registration of standardwarehouse receipt pledge from law, title change of pledged goods, which alsoincludes warehouse receipt pledge is commingled chattel mortgage, is commingledgoods pledge.The third chapter firstly introduces the legal basis and operational procedures ofwarehouse receipt pledge, and conclude that for the nature and characteristic ofcommodity product itself, warehouse finance has its own advantages. This chapterfurther compares warehouse receipt pledge with goods pledge, compares warehousereceipt pledge with chattel mortgage, and compares warehouse receipt pledge withreceivable pledge to discuss advantage and disadvantage of each different security. The fourth chapter provides some suggestion on how to perfect the security andhow to control risk in commodity structure trade finance. Firstly, perfect warehousereceipt pledge, encourage standard warehouse receipt finance, regulate non-standardwarehouse receipt. Secondly, perfect chattel mortgage and goods pledge mechanism,such as improving floating mortgage, clarifying whether chattel mortgage can claimto bona fides third party, perfecting registration system. Thirdly, risk control inpractice, like improving management of warehouse companies or collateral agent,setting up standard rules of assessment, regulating collateral management agreement,engaging external lawyer, making hedging arrangement of securities, improvingprocedure of securities enforcement.