Visa 2015 Annual Report Download - page 119

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VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2015
The Company maintains and regularly reviews global settlement risk policies and procedures to
manage settlement exposure, which may require clients to post collateral if certain credit standards are
not met.
The Company’s settlement exposure is limited to the amount of unsettled Visa payment
transactions at any point in time. The Company’s estimated maximum settlement exposure decreased
to approximately $43.5 billion for the period ended September 30, 2015, compared to $56.9 billion for
the period ended September 30, 2014. The decrease in the Company’s estimated maximum
settlement exposure for the period ended September 30, 2015 is due to recent changes in the Visa
Rules that reduced the number of transactions covered by its settlement indemnification. Of these
amounts, $2.2 billion and $3.2 billion at September 30, 2015 and 2014, respectively, were covered by
collateral. The total available collateral balances presented below were greater than the settlement
exposure covered by customer collateral held due to instances in which the available collateral
exceeded the total settlement exposure for certain financial institutions at each date presented.
The Company maintained collateral as follows:
September 30,
2015
September 30,
2014
(in millions)
Cash equivalents .............................................. $ 1,023 $ 961
Pledged securities at market value ............................... 154 148
Letters of credit ............................................... 1,178 1,242
Guarantees .................................................. 971 1,554
Total ........................................................ $ 3,326 $ 3,905
Cash equivalents collateral is reflected in customer collateral on the consolidated balance sheets
as it is held in escrow in the Company’s name. All other collateral is excluded from the consolidated
balance sheets. Pledged securities are held by third parties in trust for the Company and clients.
Letters of credit are provided primarily by client financial institutions to serve as irrevocable guarantees
of payment. Guarantees are provided primarily by parent financial institutions to secure the obligations
of their subsidiaries. The Company routinely evaluates the financial viability of institutions providing the
guarantees.
The fair value of the settlement risk guarantee is estimated using a proprietary model which
considers statistically derived loss factors based on historical experience, estimated settlement
exposures at period end and a standardized grading process for clients (using, where available, third-
party estimates of the probability of customer failure). Historically, the Company experienced minimum
losses, which has contributed to an estimated probability-weighted value of the guarantee of
approximately $1 million and $2 million at September 30, 2015 and 2014, respectively. These amounts
were reflected in accrued liabilities on the consolidated balance sheets.
Note 12—Derivative Financial Instruments
The Company maintains a rolling cash flow hedge program with the objective of reducing
exchange rate risk from forecasted net exposures of revenues derived from and payments made in
non-functional currencies during the following twelve months. The aggregate notional amounts of the
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