ADP 2010 Annual Report Download - page 37

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short
- term marketable securities,
and long
- term marketable securities) and client funds assets (funds that have been collected from clients but not yet remitted to the
applicable tax authorities or client employees).
Our corporate investments are invested in cash and cash equivalents and highly liquid, investment
- grade marketable securities.
These assets are available for repurchases of common stock for treasury and/or acquisitions, as well as other corporate operating
purposes. All of our short - term and long - term fixed - income securities are classified as available - for - sale securities.
Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary goals. Consistent with those
goals, we also seek to maximize interest income and to minimize the volatility of interest income. Client funds assets are invested in
liquid, investment
- grade marketable securities with a maximum maturity of 10 years at time of purchase and money market securities
and other cash equivalents. At June 30, 2010, approximately 79% of the available
- for - sale securities categorized as U.S. Treasury and
direct obligations of U.S. government agencies were invested in senior, unsecured, non
- callable debt directly issued by the Federal
Home Loan Banks, Fannie Mae and Freddie Mac.
We utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short
- term
financing arrangements to satisfy our short - term funding requirements related to client funds obligations. Our client funds
investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our
investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). As part of
our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client fund
obligations, rather than liquidating previously
- collected client funds that have already been invested in available - for - sale securities.
We minimize the risk of not having funds collected from a client available at the time such client
’ s obligation becomes due by
impounding, in virtually all instances, the client
’ s funds in advance of the timing of payment of such client ’ s obligation. As a result
of this practice, we have consistently maintained the required level of client fund assets to satisfy all of our client funds obligations.
There are inherent risks and uncertainties involving our investment strategy relating to our client fund assets. Such risks include
liquidity risk, including the risk associated with our ability to liquidate, if necessary, our available
- for - sale securities in a timely
manner in order to satisfy our client funds obligations. However, our investments are made with the safety of principal, liquidity and
diversification as the primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations.
We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by
consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our
$6 billion commercial paper program (rated A
- 1+ by Standard and Poor ’ s and Prime - 1 by Moody ’ s, the highest possible credit rating),
our ability to execute reverse repurchase transactions and available borrowings under our $6 billion committed revolving credit
facilities. However, the availability of financing during periods of economic turmoil, even to borrowers with the highest credit ratings,
may limit our ability to access short
- term debt markets to meet the liquidity needs of our business. In addition to liquidity risk, our
investments are subject to interest rate risk and credit risk, as discussed below.
We have established credit quality, maturity, and exposure limits for our investments. The minimum allowed credit rating at time of
purchase for corporate bonds is BBB and for asset
- backed and commercial mortgage - backed securities is AAA. The maximum
maturity at time of purchase for BBB rated securities is 5 years, for single A rated securities is 7 years, and for AA rated and AAA
rated securities is 10 years. Commercial paper must be rated A1/P1 and, for time deposits, banks must have a Financial Strength
Rating of C or better.
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