What Is a Vault Receipt?

A vault receipt is a legal document given to the owner of a futures contract whose underlying asset is stored in a vault. They are usually used for precious metals such as gold and silver, which are valuable enough to justify storing them in a secured facility.

Vault receipts are an important component of the modern futures markets, because they allow the buyers and sellers of precious metals to avoid making costly physical deliveries. Instead, they can transfer ownership simply by exchanging the vault receipt.

Key Takeaways

  • A vault receipt is a document issued to owners of futures contracts, particularly those relating to precious metals.
  • It entitles the owner to withdraw or relocate the underlying asset of the contract.
  • Most buyers choose to keep their metals stored in their existing vault, since relocating them is expensive and can prevent the owner from selling the metals on the exchange.

How Vault Receipts Work

Commodities futures markets offer a convenient way for buyers and sellers to access commodities in an efficient manner, offering advantages such as liquidity, speed of execution, and reduced counterparty risk. Although some buyers wish to take physical delivery of the commodities they buy, others are content to own the commodities while keeping them stored in a vault or warehouse that is authorized by the commodities exchange.

This approach to owning commodities can prove more cost-effective, because it allows buyers to avoid additional transportation and insurance costs. This is especially common in the case of precious metals, where new owners either have the option of keeping the metals stored at their current facility, or else transferring them to a facility of their choice. If they continue using the current facility, they will need to continue paying the storage fees and other costs. However, transferring to a new facility is usually more expensive because it involves additional transportation.

Most of the time, precious metals are kept in their original exchange-approved warehouse. Aside from the added expense of relocation, another important reason for this is that metals which are removed from the approved warehouse may no longer be eligible to be traded on the futures exchange. If a buyer wants to then reintroduce their bars into the exchange’s warehouse and use them for futures trading purposes, they may need to send the bars back to a refiner to ensure that the bars meet the exchange’s quality standards. Once the metal is back in the warehouse, the exchange would then issue a new vault receipt. As you can imagine, however, these added steps can substantially increase the costs of the precious metals investment.

Real World Example of a Vault Receipt

A standard vault receipt will include important details such as the location of the metals, their reference numbers, the name of their owner, any ongoing storage fees associated with the metals, and the date of the receipt. By holding this vault receipt, the designated owner is entitled to withdraw or relocate the metals to another facility, although doing so may prevent them from selling those metals on the exchange.

Oftentimes, the vault receipt will in fact be held by the broker who was responsible for purchasing the futures contract on behalf of the end buyer. The buyer themselves would typically not receive a physical copy of the receipt unless they specifically request one from their broker. This system is similar to the way in which stock brokers often hold shares on behalf of their clients in street name.