MoneyGram 2011 Annual Report Download - page 51

Table of Contents
investments totaled $3.1 billion, representing 97 percent of our total investment portfolio. Cash equivalents and short−term investments consist of money
market funds that invest in U.S. government and government agency securities, time deposits and certificates of deposit.
Clearing and Cash Management Banks — We collect and disburse money through a network of clearing and cash management banks. The relationships
with these banks are a critical component of our ability to maintain our global cash management requirements on a timely basis. We have agreements with
nine clearing banks that provide clearing and processing functions for official checks, money orders and other draft instruments. We have seven official
check clearing banks, of which four banks are currently operating under post−termination arrangements of their contracts. The remaining three active banks
provide sufficient capacity for our official check business. We rely on two banks to clear our retail money orders and believe that these banks provide
sufficient capacity for that business. One clearing bank contract has financial covenants that include the maintenance of total cash, cash equivalents,
receivables and investments in an amount at least equal to total outstanding payment service obligations, as well as the maintenance of a minimum
103 percent ratio of total assets held at that bank to instruments estimated to clear through that bank. Financial covenants related to special purpose entities,
or SPEs, include the maintenance of specified ratios of greater than 100 percent of cash, cash equivalents and investments held in the SPE to outstanding
payment instruments issued by the related financial institution.
We also maintain relationships with a variety of domestic and international cash management banks for ACH and wire transfer services used in the
movement of consumer funds and agent settlements. There are a limited number of international cash management banks with a network large enough to
manage cash settlements for our entire agent base, and some of these large international banks have opted not to bank money service businesses. As a result,
we also utilize regional or country−based banking partners in addition to large cash management banks.
Special Purpose Entities — For certain of our financial institution customers, we established individual SPEs upon the origination of our relationship. Along
with operational processes and certain financial covenants, these SPEs provide the financial institutions with additional assurance of our ability to clear their
official checks. Under these relationships, the investment portfolio assets and payment service obligations related to the financial institution customer are all
held by the SPE. In most cases, the fair value of the investment portfolio must be maintained in excess of the payment service obligations. As the related
financial institution customer sells our payment service instruments, the principal amount of the instrument and any fees are paid into the SPE. As payment
service instruments issued by the financial institution customer are presented for payment, the cash and cash equivalents within the SPE are used to settle
the instrument. As a result, cash and cash equivalents within SPEs are generally not available for use outside of the SPE. We remain liable to satisfy the
obligations, both contractually and under the Uniform Commercial Code, as the issuer and drawer of the official checks regardless of the existence of the
SPEs. Accordingly, we consolidate all of the assets and liabilities of these SPEs in our Consolidated Balance Sheets, with the individual assets and liabilities
of the SPEs classified in a manner similar to our other assets and liabilities. Under limited circumstances, the financial institution customers that are
beneficiaries of the SPEs have the right to either demand liquidation of the assets in the SPEs or to replace us as the administrator of the SPE. Such limited
circumstances consist of material, and in most cases continued, failure to uphold our warranties and obligations pursuant to the underlying agreements with
the financial institutions.
Consistent with 2010, the combined SPEs held 2 percent of our $3.2 billion portfolio as of December 31, 2011. As the SPEs relate to financial institution
customers we terminated in connection with the restructuring of our official check business, we expect the SPEs to decline as a percentage of our portfolio.
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