First Data 2007 Annual Report Download - page 114

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Risk Management Objectives and Strategies
The Company is exposed to various financial and market risks, including those related to changes in interest rates and foreign currency rates that exist
as part of its ongoing business operations. The Company utilizes certain derivative financial instruments to enhance its ability to manage these risks.
Derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those
exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-making or
any other speculative activities. Although certain transactions do not qualify for hedge accounting, they are entered into for economic hedge purposes and are
not considered speculative.
The Company's policy is to minimize its cash flow, fair value and net investment exposures related to adverse changes in interest rates and foreign
currency exchange rates. The Company's objective is to engage in risk management strategies that provide adequate downside protection.
CREDIT RISK
FDC does not believe that its derivative financial instruments expose it to more than a nominal amount of credit risk as the counterparties are
established, well-capitalized financial institutions with a long-term debt rating by Standard and Poor's and Moody's of "A" or "A2", unless otherwise approved
by the Company's Investment Committee. The credit risk inherent in these agreements represents the possibility that a loss may occur from the
nonperformance of a counterparty to the agreements. The Company performs a review at inception of the hedge, as circumstances warrant, and at least on a
quarterly basis of the credit risk of these counterparties. The Company also monitors the concentration of its contracts with individual counterparties. FDC
anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. FDC's exposures are in liquid currencies (primarily in
U.S. dollars, euros and Australian dollars) and active equity markets, so there is minimal risk that appropriate derivatives to maintain the hedging program
would not be available in the future.
DERIVATIVES NOT QUALIFYING FOR HEDGE ACCOUNTING
At the time of the merger all previous hedge accounting designations were nullified because of the merger. The Company redesignated certain of the
previous derivatives in the same hedging relationships to continue to qualify for hedge accounting. The remaining derivative instruments continue to function
as economic hedges but were not designated to qualify for hedge accounting. At December 31, 2007, those derivative instruments not designated as
accounting hedges include foreign currency forward contracts to hedge forecasted foreign currency sales, a cross-currency swaps contract to hedge foreign
currency exposure from an intercompany loan, a cross-currency swap contract to hedge foreign currency exposure to a net investment in foreign operations
and costless collars to hedge the anticipated cash flows from the future sale of an equity security. As of December 31, 2007, the notional amount of the
costless collars was 316,865 shares, the notional amount of the forward contracts was approximately 8.8 million Canadian dollars (approximately $8.9
million) and the notional amount of the cross-currency swaps was 21.5 million euro (approximately $31.2 million). The periodic change in the mark-to-
market of the derivative instruments not designated as accounting hedges is recorded immediately in the income statement.
In the third quarter 2007, prior to the consummation of the merger, Sub entered into two forward starting, deal contingent interest rate swaps. Such
swaps did not qualify for hedge accounting until consummation of the merger as discussed below in "Cash Flow Hedges". From the date the swaps were
entered into until designated as hedges on September 24, 2007, the swaps were marked-to-market which resulted in a charge of approximately $19 million.
This amount was recorded as a successor transaction in "Other income (expense)" in the Consolidated Statements of Income.
The Company used to hedge the commission payment obligation (cash flows) associated with its official check business by entering into interest rate
swap contracts but, due to insufficient hedge documentation, these swaps did not qualify for hedge accounting and were marked-to-market through the
Consolidated Statements of Income. By December 2006, the Company terminated all of the above noted interest rate swaps and entered into new interest rate
swaps that qualified for hedge accounting.
In 2006, in connection with a reduction in the outstanding balance of the Company's long-term debt, the Company de-designated an amount of the
associated fair value hedges in proportion to the reduction in the debt balance. On the same date that the de-designations were effective, the Company entered
into new derivative instruments ("mirror" swaps) with the terms exactly
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