Approved Warehouse

Definition

The term approved warehouse refers to a physical location authorized to receive the underlying commodity specified in a futures contract. The commodity exchange approves delivery facilities, which can include a diverse set of locations, including warehouses.

Explanation

If a futures contract is closed out before delivery, there is no need to exchange the underlying commodity. However, if the counterparties to a futures contract wish to deliver the underlying asset, the buyer and seller will transfer those assets at a facility approved by the exchange.

An approved warehouse is one of several types of facilities eligible to receive a commodity such as gold. An approved list of warehouses is published and maintained by the exchange. For example, in order for a refinery to deliver a precious metal such as gold into an exchange, it first must be produced at a refinery with a registered brand to guarantee the quality of the metal. The gold bars are then transported to the approved warehouse by an exchange approved carrier.

This rigourous process ensures the quality of a commodity such as gold. No other source of gold is permitted from the outside other than that produced and delivered via approved refineries and carriers. If gold is physically removed from this carefully controled environment, it cannot be returned to the approved warehouse, since there is no way for the exchange to guarantee its quality.

Related Terms

option writeroption buyerapproved delivery facilityalternative delivery procedure