Discover 2014 Annual Report Download - page 169

-155-
Collateral Requirements and Credit-Risk Related Contingency Features
The Company has master netting arrangements and minimum collateral posting thresholds with its counterparties
for its fair value and cash flow hedge interest rate swaps, foreign exchange forward contracts and forward delivery
contracts. The Company has not sought a legal opinion in relation to the enforceability of its master netting
arrangements, and as such, does not report any of these positions on a net basis. Collateral is required by either the
Company or its subsidiaries or the counterparty depending on the net fair value position of these derivatives held with
that counterparty. The Company may also be required to post collateral with a counterparty for its fair value and cash
flow hedge interest rate swaps depending on the credit rating it or Discover Bank receives from specified major credit
rating agencies. Collateral receivable or payable amounts are not offset against the fair value of these derivatives, but
are recorded separately in other assets or deposits.
As of December 31, 2014, DFS had a right to reclaim $4 million of cash collateral that had been posted (net of
amounts required to be posted by the counterparty) because the credit rating of the Company did not meet specified
thresholds. At December 31, 2014, Discover Bank’s credit rating met specified thresholds set by its counterparties.
However, if Discover Bank’s credit rating is reduced by one ratings notch, Discover Bank would be required to post
additional collateral, which would have been $97 million as of December 31, 2014.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if
the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been
accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
22. Segment Disclosures
The Company’s business activities are managed in two segments: Direct Banking and Payment Services.
•Direct Banking: The Direct Banking segment includes Discover-branded credit cards issued to individuals on
the Discover Network and other consumer products and services, including private student loans, personal
loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The
majority of Direct Banking revenues relate to interest income earned on the segment's loan products.
Additionally, the Company’s credit card products generate substantially all revenues related to discount and
interchange, protection products and loan fee income.
•Payment Services: The Payment Services segment includes PULSE, an automated teller machine, debit and
electronic funds transfer network; Diners Club, a global payments network; and the Company’s Network
Partners business, which provides payment transaction processing and settlement services on the Discover
Network. This segment also includes the business operations of Diners Club Italy, which primarily consist of
issuing Diners Club charge cards. The majority of Payment Services revenues relate to transaction processing
revenue from PULSE and royalty and licensee revenue (included in other income) from Diners Club.
The business segment reporting provided to and used by the Company’s chief operating decision maker is
prepared using the following principles and allocation conventions:
• The Company aggregates operating segments when determining reporting segments.
• Corporate overhead is not allocated between segments; all corporate overhead is included in the Direct
Banking segment.
• Through its operation of the Discover Network, the Direct Banking segment incurs fixed marketing, servicing
and infrastructure costs that are not specifically allocated among the segments, with the exception of an
allocation of direct and incremental costs driven by the Company's Payment Services segment.
• The assets of the Company are not allocated among the operating segments in the information reviewed by
the Company’s chief operating decision maker.
• The revenues of each segment are derived from external sources. The segments do not earn revenue from
intercompany sources.
• Income taxes are not specifically allocated between the operating segments in the information reviewed by
the Company’s chief operating decision maker.