Effective storage and control of spot commodities by warehouses is the basis for building modern spot transaction systems for bulk commodities, while warehouse receipts serve as supporting documents for obligees to retrieve the warehoused goods and vouchers for circulation and financing of the goods; therefore the significance of building the relevant systems is self-evident. However, false warehouse receipts, inconsistency between goods and receipts, repeated pledges, and other similar issues are common at present due to the laggardness and inadequacy of the relevant applicable Chinese laws, and such issues are particularly acute in steel, coal, nonferrous metal and other energy industries, which has been a handicap for the establishment of the modern spot transaction systems and the development of enterprises in the relevant industries.

The Provisions on the Administration of Trading in Bulk Commodities on Spot Markets in the China (Shanghai) Pilot Free Trade Zone (Tentative) were issued on November 17, 2014, which specify several important principles such as the “third-party warehouse receipt publicity platform” and the “publicity of classified warehouse receipt information”. However, in terms of the specific process and effect of the circulation and publicity of warehouse receipts and the settlement of disputes, the Provisions only specify in general terms that “third-party warehouse receipt publicity institutions shall formulate the concrete rules for the publicity of warehouse receipts and sign cooperation agreements with market operators and the designated delivery warehouses, specifying the relevant business process, and the rights, obligations and responsibilities of the parties”, without any detailed treatment rules. In this paper, the author sorts the potential risks associated with the circulation, registration and publicity of warehouse receipts in the field of spot transactions, analyzes the rules for the settlement of disputes concerning such legal risks based on the applicable domestic laws and the relevant juridical practice, and thus gives suggestions on how to reduce and avoid the relevant legal risks in building China’s spot markets for bulk commodities.

I. Main Legal Risks

(I) Legal risks arising from the defects of goods under the warehouse receipts

1. Legal risks arising from the inherent defects of goods

The inherent defects of goods refer to the defects already existing before the goods are put in storage, and the actual status of the goods is inconsistent with the warehouse receipt issued by the warehouse, mainly including the following: 

  1. The depositor is not the actual owner of the goods and has no right to dispose of the goods;
  2. Due to slack supervision by the warehouse or its malicious collusion with the depositor, the “issue of the warehouse receipt before the receipt of goods” occurs, that is, the warehouse issues a warehouse receipt in the absence of the receipt of the goods; 
  3. The category, quantity, grade and other information of the goods are inconsistent with those specified in the warehouse receipt, resulting in shoddy quality and insufficient quantity. 

2. Defects of goods occurring during storage

  1. Deterioration or ordinary wear and tear of the goods due to their nature; 
  2. Damage or loss of the goods for artificial reasons. 

(II) Legal risks arising from the concurrence of rights over the warehouse receipt and the corresponding goods

Disputes arising from the concurrence of rights over the warehouse receipt and the corresponding goods are the most prominent legal risks in practice, for example, if any third party has created real rights for security over the goods during the spot transaction of the goods; the warehouse, through malicious collusion with the depositor, issues several warehouse receipts for the same batch of goods, based on which applications for pledge loans are respectively filed with banks; the depositor pledges the warehouse receipt to a third party while mortgaging or transferring the goods to another third party. The phenomenon of “loan fraud by small-sized steel trading enterprises” which has brought very bad influences in the Yangtze River Delta region this year is very typical. In short, the relevant legal risks mainly include: 

1. Concurrence of identical real rights for security over movable property existing on the warehouse receipt or the corresponding goods 

  1. Several movable property mortgages are created on the same batch of goods.
  2. Several movable property pledges are created on the warehouse receipt or the corresponding goods.

2. Concurrence of different real rights for security over movable property existing on the warehouse receipt or the corresponding goods 

  1. Concurrence of the warehouse receipt pledges and the mortgages created on the goods.
  2. Concurrence of the relevant mortgages, pledges and liens.

3. Concurrence of the rights of the holder of the real right for security over movable property and the counterparty of the spot transaction 

(III) Legal risks arising from the registration and publicity of warehouse receipts

To develop spot markets for bulk commodities and enable the participants to learn about the information of goods in a public, transparent and timely manner and to participate in spot transactions, the rules for the publicity and circulation of warehouse receipts serve as the basis and core of the transaction rules for spot markets. However, in accordance with the Property Law, the Guarantee Law and other relevant regulations, the transfer and pledge of a warehouse receipt, as a document of title, is not conditioned upon the registration and publicity of the warehouse receipt, which inevitably brings some legal risks to the registration and publicity of warehouse receipts, including:

  1. How to define the publicity of warehouse receipts under the current legal framework; and
  2. How to solve the compatibility and conflicts among several publicity platforms. 

(I) Rules for settlement of disputes arising from the inherent defects of goods

When a seller participating in the spot transaction delivers the goods to a warehouse and pays it the warehousing fee, and the warehouse keeps and stores the goods, the two parties form a warehousing contractual relationship, under which the seller is the depositor and the warehouse is the depository. 

The depository shall, based on the depositor’s descriptions on the goods, carefully conduct warehouse-in inspections of the goods and truthfully record the actual status thereof on the warehouse receipt. Where in the course of such inspections the depository discovers that the goods are not in conformity with the agreed terms, it shall timely notify the depositor. Upon acceptance of the goods and issue of a warehouse receipt by the depository, the goods recorded on the warehouse receipt shall be deemed to have been stored in the relevant warehouse without defect, and the depository shall be responsible for safekeeping of the goods. 

If the depository discovers that the warehoused goods are likely to deteriorate or be otherwise damaged, it shall timely notify the depositor or the holder of the warehouse receipt, and the depositor or the holder shall be entitled to inspect the warehoused goods in the warehouse or take samples of the goods. In case of any damage, deterioration or loss of the warehoused goods in the warehousing period, generally, it may be presumed that such is caused by the improper safekeeping of the depository, and the depository shall be liable for compensation to the depositor or the holder, but the depository may produce evidence to prove that the goods are deteriorated or damaged due to the unconformity in the nature of the warehoused goods or in the packing with the agreed terms, the fact that the goods exceed the valid storage period, or other reasons not attributable to the depository, in which case the depository may not be liable for damages. 

No matter whether the defects of goods already existed before being put in storage, or are caused during the warehousing period, or the depositor and the depository commit a malicious collusion, the counterparty of a spot transaction, based on its trust in the contents recorded on the warehouse receipt, is entitled to directly require the seller to deliver the goods recorded thereon according to the purchase and sales contract concluded with the seller. Otherwise, it may request the seller to bear the liability for breach. In addition, according to the transaction rules of some spot markets, the counterparty is also entitled to require the depository to bear joint and several liabilities. The depositor and the depository shall, at their discretion, define the reasons for the defects of the goods and the division of responsibilities between them after they assume responsibilities to any third party, which shall have nothing to do with any third party. 

(II) Rules for the treatment of legal risks arising from concurrence of rights over the warehouse receipt and the corresponding goods

1. Concurrence of the same real rights for security

The real right for security over movable property is a limited real right for security created on a specific movable property provided by a debtor or a third party to ensure the clearing of debts, which is a security interest created on the movable property. In accordance with the current laws, there are three property security modes in China, i.e., mortgages, pledges and liens. Under the security by real property, as there is a strict registration publicity system as the guarantee of real property and for legal confirmation, generally no conflict of effects will occur; while for movable property, it turns out to be very complex. In principle, there is only one real right for security existing on an independent movable property, but this principle does not absolutely exclude two or more real rights existing on the independent property, which makes possible the concurrence of the real rights for security over movable property. In a spot transaction, the possible concurrence of rights and the general treatment rules are described as follows: 

(1) Concurrence of movable property mortgages

As for the establishment and effectiveness of mortgages, Article 41 of the Guarantee Law specifies, “The mortgaged property shall be registered when falling into the categories listed in Article 42 and the mortgage contract shall go into effect as of the date of registration.” Generally, the provision mixes up the effect of the mortgage contract, the effectiveness of the mortgage and the resistance effect of the mortgage. According to this provision, if two parties fail to go through the registration procedures after conclusion of a mortgage contract, the mortgage contract shall be invalid and the creditor shall not be entitled to the mortgage, and only the debtor can be held liable for contracting faults. This is obviously not conducive to the protection of the creditor’s interests. Therefore, it has long been criticized. This provision was modified in the Property Law. As for the movable property mortgage, in principle, the mortgage shall take effect immediately upon the execution of the mortgage contract. Without registration, neither party may challenge any bona fide third party. In case of any discrepancy between the Guarantee Law and Property Law, according to the principle that new laws precede over old laws, the Property Law shall prevail. 

Therefore, where the depositor or the holder of the warehouse receipt concludes a mortgage guarantee contract with several creditors successively, the creditor’s mortgage shall be deemed to have taken effect, regardless of whether or not mortgage registration has been completed and the concurrence of rights has occurred. 

The conflicts incurred are generally settled by two basic rules: one is the principle of “prior registration”, that is, the sequence for the realization of the movable property mortgages shall be determined as per the order of registrations, i.e., a registered mortgage shall have priority over one unregistered, and the movable property mortgage registered first shall have priority over the one registered later; the other is the principle of “same time and same sequence”, that is, the movable property mortgages which are registered at the same time (generally on the same day) are of the same sequence, and the mortgagees of the movable property shall be entitled to seek preferred payments from the proceeds incurred from the sell-off of the mortgaged movable property in proportion to their creditor’s rights. 

It should be noted that when several concurrently existing movable property mortgages are not registered, there are two different claims in the current legislation and theories, i.e., “prior creation” and “same sequence”. Article 54 of the Guarantee Law specifies, based on the principle of “prior creation”, that, “If no mortgage has been registered, the payments shall be made in accordance with the order of the first effective day of the contracts”, while Article 199 of the Property Law specifies, based on the principle of same sequence, that “If no mortgage has been registered, the payments shall be made in proportion to the creditor’s rights”. The author holds that the principle of “same sequence” is more conductive to the safety and fairness of transactions than the principle of “prior creation”. If the principle of “prior creation” is applied, the mortgagor and some mortgagee may commit malicious collusion or change, without authorization, the effective date of the contract in order to achieve the unlawful purpose of seeking the preferred payments under the mortgage. Meanwhile, as the mortgage created first has no publicity effect in the absence of registration, if the mortgagor conceals the mortgage that has been created on its movable property, and the later mortgagee who does not know the same repeatedly creates a mortgage on the movable property, according to the principle of prior creation, the sequence of payment of such mortgagee must be inferior to the previous creditor, and such result is unforeseen and unfair to it, and makes the transaction participants always worried about the existence of prior creation of unregistered mortgages on the goods. Therefore, the provision of the Property Law that the “the mortgagees of the movable property shall be entitled to seek preferred payments in proportion to their creditor’s rights” should be more scientific.  

(2) Concurrence of movable property pledges

With respect to the concurrency of several movable property pledges, there are no explicit stipulations of laws other than the provision in the Judicial Interpretation of the Guarantee Law that “If the pledgee, with the consent of the pledger, creates a pledge over the pledged property in its possession in favor of any third party, the transferred pledge shall have priority over the original pledge.” This is because legislators believe that since the establishment of a pledge is conditioned upon the transfer of possession of the movable property, more than two possessions cannot exist on one property, nor can more than two pledges be established, that is, the concurrency of movable property pledges cannot occur. 

However, from a practical perspective, this view no longer meets the development trend of the real rights for security and the actual needs. On the one hand, the “transfer of possession” in the modern sense has far exceeded the limit of “direct possession”, and the possession may be realized through several indirect ways, and the pledgee only needs to put the pledged property under its control. On the other hand, with the development of the pledge of rights, the separability of the movable property rights represented by the document of title with the actual movable property makes the concurrence of pledges possible. In practice, the repeated pledges caused by the issuing of several warehouse receipts by warehouses are typical cases of the concurrence of movable property pledges. 

In the absence of applicable laws, the treatment rules for the concurrence of the above pledges have been extensively discussed in both academic circles and juridical practice. As for issues on repeated pledges arising from the issue of several warehouse receipts for the same batch of goods, the Shanghai Higher People's Court concluded the opinions in the internal seminars that the holders of the warehouse receipts shall bear the burden of proof to establish that they are in good faith without faults, and have realized the actual control over the warehoused goods. If the holders of the warehouse receipts are unable to prove their actual possession of the warehoused goods, generally the pledges are identified as untenable, and the relevant creditors shall not claim for priority in receiving payment from the warehoused goods.

The author holds that this solution underlines that the effectiveness of a pledge is conditioned upon the “possession” of the pledged property, and that the warehouse receipt absolutely corresponds to the goods. If the holders of the warehouse receipts fail to actually control the pledged property, it means that the pledged property has not actually been transferred, and therefore the pledge cannot come into effect. This is of practical significance in urging banks and other financial institutions to conduct strict examination on applications for warehouse receipt pledge loans to control the current disordered financing in steel trading and other fields. 

However, it is worth studying that what distinguishes the pledge of rights from the pledge of general movable property is that the subject matter of the former is “right” rather than “property”. When a warehouse receipt is used for a pledge, the object of the pledge is the “right to retrieve the goods according to the warehouse receipt”. In addition, the core reason why the warehouse receipt can serve as a voucher for transfer and circulation is that the holder of the warehouse receipt believes “holding the warehouse receipt represents control over the goods”. Therefore, as what a number of scholars said before, the holding of the document of title represents the possession of the goods. In juridical practice, the emphasis on the actual possession of goods makes, in some sense, means that pledge of general movable property equals to pledge of rights. However, given the absence of current legislation and the urgency of regulating repeated pledges and other disordered phenomena, the Shanghai Higher People's Court had no other choice but to adopt such a solution.  

2. Concurrence of different real rights for security

(1) Concurrence of mortgages and pledges 

As a mortgage may take effect without transfer of possession of the mortgaged goods, it is entirely possible that a mortgage and a pledge concurrently exist on an independent movable property, especially in spot transactions of bulk commodities, and it is not rare that the owner of goods mortgages the goods to a creditor while pledging the warehouse receipt to another entity. As for the concurrence of the mortgage and the pledge, under applicable Chinese laws, only Article 79 of the Judicial Interpretations of the Guarantee Law specifies that, “If the same property is encumbered by both a statutorily registered mortgage and a pledge, the mortgagee shall have priority to get paid over the pledgee”. However, this provision is too broad and fails to distinguish various situations that may occur in practice. What's more, the provisions on the effects of mortgage registration in the Guarantee Law have been greatly modified in the Property Law. In this case, how to understand the “statutorily registered mortgage” in the Judicial Interpretations of the Guarantee Law is much disputed, and the legislation on such an issue is obviously blank. In practice, the concurrence of the mortgage and the pledge is often treated as per the following rules:

If a mortgage is established before a pledge, and the mortgage has been registered, in accordance with the Articles 188 and 189 of the Property Law, the registered mortgage has the effect against any third party, and the scope of such third party shall also include pledgees. The pledgees should have known that the pledged property has been mortgaged to others when creating a pledge on such property. In such a case, the mortgage shall have priority over the pledge according to the principle of “prior registration”. If the mortgage that is established earlier has not been registered, even if the mortgage has taken effect, it shall have no effect against any third party. For a pledge of general movable property, the pledgee has actually possessed the pledged property, and such status of possession has the effect of publicity and resistance. Therefore, even if the mortgage takes effect earlier than the pledge, the pledge shall still have priority over the mortgage. 

If a pledge is established before a mortgage which has not been registered, the pledge certainly has priority over the mortgage. However, under the registration of the mortgage, how to define the sequence for the realization of the real rights for security is often disputed. There is a viewpoint that the principle of “prior registration” should be followed in such case, and the registered mortgage shall have priority over the pledge. The author holds that this viewpoint needs to be questioned. The reason why the Property Law specifies that the mortgage’s effect against any third party shall be conditioned upon registration is that the mortgage may be created without the need to transfer possession, while the creation of the pledge is conditioned upon transfer of possession, and the “transfer of possession” has the effect of publicity and resistance. There is no intrinsic difference between the two publicity methods of “registration” and “possession”, and the difference between the publicity methods is determined by the characteristics of the pledge and the mortgage, and the “registration” cannot be simply considered to be superior to the “possession”. For a pledge of general movable property, as the pledgee has possessed the pledged property and may challenge any third party, such third party should have known that a pledge has been created on the pledged property by others. Therefore, even if the mortgage is registered thereafter, the prior pledge shall generally have priority over the mortgage. 

It is important to note that the above treatment rules for the concurrence of a pledge and a mortgage are based on the pledge of general movable property. As for the pledge of rights, the possession transferred between the parties is the document of title only rather than the goods, and it is often impossible for publicity of the creation of a pledge over the goods, so it is impossible for a third party to know the existence of the pledge over the goods. Under this circumstance, for treatment rules for the concurrence of an unregistered mortgage established earlier and a pledge established later” and that of “a pledge established first and a registered mortgage established later”, there is no applicable law for reference, which needs to be further modified and supplemented.

(3) Concurrence of mortgages, pledges and liens

Under special circumstances, the concurrence of mortgages, pledges and liens may occur. For example, a depositor respectively mortgages (pledges) the goods and the warehouse receipt to different creditors, while the relevant goods are retained by the warehouse due to the depositor’s failure in payment of the warehousing fee to the warehouse. In such a case, it is generally believed that the lien shall have priority over the mortgage and the pledge. On the one hand, the lien is a statutory real right for security, while the mortgage and the pledge are agreed real rights for security, and the statutory real right for security shall have priority over the agreed real rights for security; on the other hand, the direct possession is an absolute condition of a lien, and loss of possession means loss of the lien. The direct possession by itself serves as publicity of the lien, and has the statutory effect of publicity and conforms to the principle of publicity and confidence. The Judicial Interpretation of the Guarantee Law also adopts this viewpoint and provides that “If the same property is encumbered by both a mortgage and a lien, the lien-holder shall have priority in receiving payment over the mortgagee.” However, due to the historical limitation of legislation, the concurrence of a lien and a pledge is not specified therein. 

3. Conflict of the rights of the holder of the real right for security and the counterparty of the spot transaction 

In the process of a spot transaction, the goods on which a real right for security has been created in favor of any third party are likely to be traded on a spot market, in which case conflicts between the rights of the holder of real rights for security and the counterparty of the spot transaction will occur. Such conflicts are generally settled according to the following rules:

Generally, in case of prior registration of a mortgage or a pledge, according to the publicity and resistance effect of registration or possession, even if the counterparty of a spot transaction has paid for the goods, it cannot claim the real right over the goods, but only the creditor’s rights against the seller. Of course, the mortgagee or the pledgee may seek payment from the money incurred from such transaction in advance or submit said money to a competent authority for an escrow. If the mortgage has not been registered, it can not challenge any bona fide third party that has made payment and actually possessed the goods. 

In particular, if the party involved creates a floating mortgage of movable property as specified in Article 181 of the Property Law, it can not challenge the buyer that has paid a reasonable price in normal business operations and obtained the mortgaged property in accordance with Article 189 of the Property Law, regardless of whether the mortgage has been registered. This provision of the Property Law is based on the fact that the floating mortgage is a creation of security over the existing and future property, and the mortgagor may possess, use and dispose of the mortgaged property during the mortgage period. If a part or all of the movable property is mortgaged, and the mortgagor is prohibited from disposing of such property, the mortgagor will be unable to normally carry out business activities, and finally unable to pay off the debts to the mortgagee. In particular, the subject matter of a floating mortgage of movable property is generally raw materials or finished goods inventory, and such movable property is often in a process of flowing. Since the mortgagor is permitted by law to dispose of the mortgaged property during the mortgage period, since the floating mortgage is characterized by the uncertainty during the mortgage period and the disposal of the mortgaged property being free from the force of recourse on property before its final determination, and since the possession is a publicity method for presumption of the ownership of the movable property, attention should be paid to the protection for the rights of the buyer of the property under the floating mortgage. Otherwise, the transaction of movable property will become complicated and burdensome, which will not be conductive to both flowing of property and conclusion of transactions, and cannot adapt to the needs of modern business. 

(III) Legal risks arising from the registration and publicity of warehouse receipts

As described above, to enable the participants in spot transactions of bulk commodities to timely understand the information of goods, reduce transaction risks and improve transaction efficiency, a concentrated electronic warehouse receipt publicity platform is of great importance to the construction of spot markets of bulk commodities. However, the lagging applicable laws still govern the pledge of rights from a traditional prospective, resulting in the disconnection between the applicable laws and the reality to some extent. In the field of the pledge of rights, the “transfer of possession” in the pledge of general movable property, as a means of publicity to challenge any third party, often cannot realize the function of publicity of the real right for security to such third party. Under such circumstances, recognition of the resistance effect of the pledge of rights seems to be in a dilemma: if the transfer of possession based on the document of title such as warehouse receipts is still recognized to have the effect against any third party, it is actually unfair to the third party that does not know the existence of the pledge; if the transfer of the possession of the warehouse receipts is recognized to have no effect against any third party, the pledgee still needs to actually control the goods under the warehouse receipts, which seems to impose further obligations on the pledgee in addition to the applicable laws, and deprives the pledge of its predictive power regarding the law. 

Under the failure of the “possession publicity” mode, the introduction of the publicity system of warehouse receipts is of great significance. Similar to the publicity of mortgage registration, the pledge publicity of warehouse receipts will enable the parties to clarify the agreements on the pledge and thereby avoid occurrence of anti-dated pledge guarantee contracts, and will also enable any third party to promptly learn about the information regarding right limitations on the movable property and thereby provide reference and guidance for its business decisions.

Different from the mortgage registration, in addition to the pledge of “intangible movable property” such as accounts receivable and intellectual property rights, there are neither applicable laws that specify the statutory registration authorities for the pledge of warehouse receipts, bills of lading and other negotiable securities, nor laws or administrative regulations that authorize certain national authorities or registration platforms to be responsible for the unified registration of the pledges of movable property. This brings legal risks to the warehouse receipt registration publicity platforms for transaction markets of bulk commodities in two aspects: (i) how to identify the publicity effect of the relevant registration publicity platforms; and (ii) how to solve the conflicts among different platforms. 

Tianjin is a national pilot region for the reform of ownership registration of movable property. The Financial Service Office of the Tianjin Municipal People's Government and the People’s Bank of China Tianjin Branch issued the Measures for the Inquiry of Ownership Registration Information of Movable Property of Tianjin City (Tentative) in March 2013, and the Higher People's Court of Tianjin Municipality issued the Guiding Opinions on Issues Concerning the Registration and Publicity Involved in the Hearing of Dispute Cases on the Ownership of Movable Property (hereinafter referred to as the “Guiding Opinions”) in January 2014. The Guiding Opinions specify three methods for the registration of movable property: (i) entrusted publicity, which means that the statutory registration authority completes the registration itself and then entrusts a registration institution to make publicity of the ownership status of the movable property, and the inquiry certificate issued by the registration institution has equal legal effect as that issued by the statutory registration authority and it shall be confirmed by the People’s Court; (ii) entrusted registration, which means that the statutory registration authority may entrust a registration institution to make registration and publicity of the ownership status of the movable property, provided that the statutory registration authority shall assume the legal liability for the consequences arising therefrom; and (iii) voluntary registration, which means that the parties involved may voluntarily go through the registration at a registration institution, if there is no current law or administrative regulation that specifies the statutory registration authority for the ownership of movable property. According to the regulations, the non-statutory registration of the pledges of warehouse receipts, bills of lading, etc. falls within the scope of voluntary registration, and the registration of the pledges at a registration platform still has no legal effect against any third party, but has the evidentiary effect in a lawsuit. As for the pledge enjoyed by the pledgee, the relevant entities should have known that such registration has the evidentiary effect on the existence of the prior pledge of the pledgee. The author believes that the relevant regulations of Tianjin City are of certain reference significance.

III. Suggestions on the Avoidance of Risks

Given the inadequacy of the relevant applicable laws and frequent disputes arising from spot transactions, it is advised to adopt the following strategies in the construction of spot markets for bulk commodities to avoid, to the greatest extent, the occurrence of the aforesaid legal risks:  

(I) Restrict qualifications and scope of the participants 

First, to prevent some units or individuals from conducting contract fraud or investment in the name of spot transactions and ensure the participants of spot transactions have a strong ability of risk control and response, all buyers and sellers participating in the spot transactions of bulk commodities in the free trade zones should be required to have business experience in the commodities traded and possess abundant capital, and in principle, no individuals are allowed to participate in the transaction of bulk commodities. 

Second, strict restrictions should be imposed on qualifications of warehouses, and only those bonded warehouses in the free trade zones with abundant capital, regulated management, and sufficient warehousing, inspection and supervision capacities may serve as the warehouses for transaction markets, and the warehouses shall be strictly prohibited from participating in the spot transactions, and in principle, no warehouse may provide pallet services or other disguised financing services to the participants of spot transactions 

Third, the participants should be required to declare their relationships, to avoid the manipulation over markets through collusion, or malicious collusion between the participants and warehouses, etc. 

(II) Strengthen responsibilities of warehouses

Considering that loan fraud cases of steel trading enterprises frequently occurring in recent years often involve the illegal operations of warehouses, it is necessary to strengthen the responsibilities of warehouses so as to improve the spot markets of bulk commodities in free trade zones. For example, the exchanges and warehouses may conclude cooperation agreements, specifying that the warehouses shall regulate and improve the systems for the issue of warehouse receipts and the use of seals, and strictly make sure of the consistency between the warehouse receipts and goods, to prevent the internal staff from issuing, without authorization, warehouse receipts in violation of regulations; for the warehouse-in/out of goods, the warehouses shall issue receipts and inspection documents and make commitments on absence of right limitations; when applying for the warehouse receipt pledge financing, they shall issue an Irrevocable Guarantee on Assistance in Exercise of the Pledge; and voluntarily undertake to assume joint and several liabilities for the obligee’s failure to perform its rights for reasons of the warehouse receipts or defects of goods, and withdraw a certain proportion of risk reserve to respond to the daily risks.

(III) Improve the warehouse receipt system and the relevant transaction management systems

The exchanges may specify in the “market access agreements” concluded with the spot transaction participants that the participants voluntarily recognize the publicity effect of the warehouse receipt registration publicity platforms designated by the exchanges; require that the warehouse receipts of the warehouse platforms must conform to the latest national standard for warehouse receipts which took effect on July 1, 2014, unify to some extent the issues on issuing process of warehouse receipts, contents recorded thereon, etc. and detail the records of the warehouse receipts, so as to ensure the direct correspondence between the warehouse receipts and the goods to the greatest extent, and protect the “actual possession and control” of the warehoused goods by the holders of the warehouse receipts. In addition, the exchanges may learn lessons from the warehouse receipt management mode of the Shanghai Futures Exchange under which electronic warehouse receipts are the main form of warehouse receipts and relevant operations of the warehouse receipts are realized through the electronic warehouse receipt management system. This move will effectively reduce the risks of the illegal issue and use of warehouse receipts by the warehouses.

In addition to the introduction of performance guarantee systems such as down payments and security deposits, the two parties to a transaction that meet certain conditions may be required to purchase insurance for the transaction, and an independent audit institution may be introduced to regularly inspect management of the warehouses, etc., to further maintain transaction safety and reduce transaction risks. 

(IV) Improve the construction of warehouse receipt registration publicity platforms

As an important basic system in the spot transaction systems, the construction of the warehouse receipt registration publicity platforms directly influences efficiency and safety of transactions. To enable the participants of spot transactions and other entities to conveniently learn about the warehouse receipts and the actual status of the corresponding goods, define the ownership status of movable property, and improve the credibility and influence of the registration publicity, the threshold for access to the warehouse receipt registration publicity platforms shall be reduced, and any unit and individual may be allowed to have a free access to the basic information of warehouse receipts, while certain confidentiality means may be taken for the specific information involving the business secrets of the relevant units. 

To solve the conflicts among different registration publicity platforms and avoid mutual dilution of the credibility of registration publicity of platforms, the main registration platforms (such as the Credit Information Center of the People’s Bank of China) may cooperate to realize data sharing and interconnection. 

In addition, given that the warehouse receipt registration publicity platforms are unofficial registration institutions, to reduce their own risks, they may specify, in the form of “Notice for Use”, “Inquiry Descriptions”, etc. and in accordance with the Property Law and other relevant laws, that the contents contained on the platforms have no effect to directly challenge any third party, but they may provide the parties in dispute with relevant supporting documents for use in lawsuits, and meanwhile, the relevant information contained on the platforms are for reference purposes only, and the inquiring entities may check the details with the warehouses. The registration publicity platforms are not liable for the registered contents, with the exception of mistakes that are caused by their own faults and have brought actual damages to the inquiring entities who have exercised reasonable care.