MasterCard 2012 Annual Report Download - page 126

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 19. Settlement and Other Risk Management
MasterCard’s rules guarantee the settlement of many of the MasterCard, Cirrus and Maestro branded
transactions between our issuers and acquirers (“settlement risk”). Settlement exposure is the outstanding
settlement risk to customers under MasterCard’s rules due to the difference in timing between the payment
transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the
duration of settlement 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 exposure 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 of the failed customer. 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 settlement
exposure. These risk management procedures include interaction with the bank regulators of countries in which
the Company operates, 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 the Company is not contractually obligated under our rules to effect
such payments to merchants, 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 exposure are revised as necessary.
The Company’s estimated settlement exposure from MasterCard, Cirrus and Maestro branded transactions
was as follows:
December 31,
2012
December 31,
2011
(in millions)
Gross settlement exposure ..................................... $37,768 $39,102
Collateral held for settlement exposure ........................... (3,775) (3,482)1
Net uncollateralized settlement exposure ......................... $33,993 $35,620
1Represents collateral held against MasterCard-branded exposure only.
MasterCard-branded travelers cheques are no longer being issued. For previously issued travelers cheques,
MasterCard guarantees the payment of MasterCard-branded travelers cheques in the event of issuer default. The
term of the guarantee is unlimited, while the exposure is limited to cheques issued but not yet cashed. The
notional amount of cheques issued, but not yet cashed was $539 million and $564 million at December 31, 2012
and 2011, respectively, of which $434 million and $455 million at December 31, 2012 and 2011, respectively, is
mitigated by collateral arrangements.
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