MasterCard 2008 Annual Report Download - page 141

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except percent and per share data)
MasterCard is aware that regulatory authorities and/or central banks in certain other jurisdictions including
Brazil, Colombia, Czech Republic, Mexico, Venezuela, Estonia, Israel, Italy, Norway, Portugal, Switzerland and
Turkey are reviewing MasterCard’s and/or its members’ interchange fees and/or related practices (such as the
“honor all cards” rule) and may seek to regulate the establishment of such fees and/or such practices.
Note 21. Settlement and Travelers Cheque Risk Management
MasterCard International’s rules generally guarantee the payment of certain MasterCard, Cirrus and
Maestro branded transactions between its principal members. The term and amount of the guarantee are
unlimited. Settlement risk is the exposure to members under MasterCard International’s rules (“Settlement
Exposure”), due to the difference in timing between the payment transaction date and subsequent settlement.
Settlement Exposure is estimated using the average daily card charges during the quarter multiplied by the
estimated number of days to settle. The Company has global risk management policies and procedures, which
include risk standards, to provide a framework for managing the Company’s settlement risk. Member-reported
transaction data and the transaction clearing data underlying the settlement risk calculation may be revised in
subsequent reporting periods.
In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard
International may seek an assignment of the underlying receivables. Subject to approval by the Board of
Directors, members may be charged for the amount of any settlement loss incurred during the ordinary activities
of the Company.
MasterCard requires certain members that are not in compliance with the Company’s risk standards in effect
at the time of review to post collateral, typically in the form of letters of credit and bank guarantees. This
requirement is based on management review of the individual risk circumstances for each member that is out of
compliance. In addition to these amounts, MasterCard holds collateral to cover variability and future growth in
member programs. The Company also holds collateral to pay merchants in the event of merchant bank/acquirer
failure. Although it is not contractually obligated under MasterCard International’s rules to effect such payments,
the Company may elect to do so to protect brand integrity. MasterCard monitors its credit risk portfolio on a
regular basis and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its
risk management methodology and standards. As such, the amounts of estimated settlement risk are revised as
necessary.
Estimated Settlement Exposure, and the portion of the Company’s uncollateralized Settlement Exposure for
MasterCard-branded transactions that relates to members that are deemed not to be in compliance with, or that
are under review in connection with, the Company’s risk management standards, were as follows:
2008 2007
MasterCard-branded transactions:
Gross Settlement Exposure ................................... $21,179,044 $22,783,200
Collateral held for Settlement Exposure ......................... (1,813,171) (2,161,754)
Net uncollateralized Settlement Exposure ....................... $19,365,873 $20,621,446
Uncollateralized Settlement Exposure attributable to
non-compliant members ................................. $ 56,795 $ 108,141
Cirrus and Maestro transactions:
Gross Settlement Exposure ................................... $ 3,236,175 $ 3,347,853
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