MasterCard 2011 Annual Report Download - page 138

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
between the payment transaction date and subsequent settlement. The duration of this exposure is short term and
typically limited to a few days. Settlement Exposure is primarily estimated using the average daily card volume
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. Customer-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 effects a payment on behalf of a failed customer, MasterCard may seek an
assignment of the underlying receivables. Subject to approval by the Board of Directors, customers may be
charged for the amount of any settlement loss incurred during these ordinary course activities of the Company.
The Company’s global risk management policies and procedures are aimed at managing the risk of
settlement loss. These risk management procedures include interaction with the bank regulators of countries in
which we operate, requiring customers to make adjustments to settlement processes, and requiring collateral from
customers. MasterCard requires certain customers 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 cash, letters of credit, or guarantees. This
requirement is based on management’s review of the individual risk circumstances for each customer that is out
of compliance. In addition to these amounts, MasterCard holds collateral to cover variability and future growth in
customer programs. The Company may also hold collateral to pay merchants in the event of merchant bank/
acquirer failure. Although we are not contractually obligated under our rules to effect such payments to
merchants, we 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 customers 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:
December 31,
2011
December 31,
2010
(in millions)
MasterCard-branded transactions:
Gross Settlement Exposure .................................... $34,624 $29,695
Collateral held for Settlement Exposure .......................... (3,482) (3,062)
Net uncollateralized Settlement Exposure ......................... $31,142 $26,633
Uncollateralized Settlement Exposure attributable to non-compliant
customers ............................................... $ 479 $ 279
Cirrus and Maestro transactions:
Gross Settlement Exposure .................................... $ 4,478 $ 3,210
Although MasterCard holds collateral at the customer level, the Cirrus and Maestro estimated Settlement
Exposures are calculated at the regional level. Therefore, these Settlement Exposures are reported on a gross
basis, rather than net of collateral.
Of the total uncollateralized Settlement Exposure under the MasterCard brand, the United States accounted
for approximately 31% and 33% at December 31, 2011 and 2010, respectively. With the exception of Brazil,
which was 17% and 16% at December 31, 2011 and 2010, respectively, and France, which was 10% and 7% at
134