Discover 2009 Annual Report Download - page 145

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Counterparty Settlement Guarantees. Diners Club and DFS Services LLC, on behalf of PULSE, have various counterparty
exposures, which are listed below.
Merchant Guarantee. Diners Club has entered into contractual relationships with certain international merchants,
which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the
primary liability to settle the transactions of their customers with these merchants. However, Diners Club retains a
counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants.
Inter-licensee Guarantee. Diners Club retains counterparty exposure if a licensee fails to settle amounts resulting from
customer transactions processed in the territory of another licensee.
ATM Guarantee. PULSE entered into contractual relationships with certain international ATM acquirers in which DFS
Services LLC retains counterparty exposure if an issuer fails to fulfill its settlement obligation.
The maximum potential amount of future payments related to such contingent obligations is dependent upon the
transaction volume processed between the time a counterparty defaults on its settlement and the time at which the
Company disables the settlement of any further transactions for the defaulting party, which could be three days to one
month depending on the type of guarantee/counterparty. The actual amount of the potential exposure cannot be
quantified as the Company cannot determine whether the current or cumulative transaction volumes will not be settled by
its counterparties. While the Company has contractual and/or regulatory remedies to offset these counterparty settlement
exposures, in the event that all licensees and/or issuers were to become unable to settle their transactions, the Company
estimates its maximum potential counterparty exposures to these settlement guarantees, based on historical transaction
volume of up to one month, would be as follows:
For the Years Ended
November 30,
2009 2008
Diners Club:
Merchant guarantee (in millions) ............................................................................................................................................ $530 $600
Inter-licensee guarantee (in millions) ....................................................................................................................................... $ 75 $ 12
PULSE:
ATM guarantee (in thousands) ............................................................................................................................................... $808 $ —
With regard to the counterparty settlement guarantees discussed above, the Company believes that the estimated
amounts of maximum potential future payments are not representative of the Company’s actual potential loss exposure
given Diners Club’s and PULSE’s insignificant historical losses from these counterparty exposures. As of November 30,
2009, the Company had not recorded any contingent liability in the consolidated financial statements for these
counterparty exposures, and management believes that the probability of any payments under these arrangements is low.
The Company also retains counterparty exposure for the obligations of Diners Club licensees that participate in the
Citishare network, an electronic funds processing network. Through the Citishare network, Diners Club customers are able
to access certain ATMs directly connected to the Citishare network. The Company’s maximum potential future payment
under this counterparty exposure is limited to $15 million, subject to annual adjustment based on actual transaction
experience. However, as of November 30, 2009, the Company had not recorded any contingent liability in the
consolidated financial statements related to this counterparty exposure, and management believes that the probability of
any payments under this arrangement is low.
Merchant Chargeback Guarantees. The Company issues credit cards and owns and operates the Discover Network.
The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute
between the credit card customer and a merchant. The contingent liability arises if the disputed transaction involves a
merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the
customer’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer,
who in turn credits its customer’s account. The Discover Network will then charge back the transaction to the merchant or
merchant acquirer. If the Discover Network is unable to collect the amount from the merchant or merchant acquirer, it will
bear the loss for the amount credited or refunded to the customer. In most instances, a payment obligation by the Discover
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