First Data 2009 Annual Report Download - page 85

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
the Company does not intend to sell an impaired debt security and it is not more likely than not it will be required
to sell prior to recovery of its amortized cost basis, the Company assesses whether it will recover its amortized
cost basis. If the entire amortized cost will not be recovered, a credit loss exists resulting in the credit loss portion
of the OTTI being recognized in earnings and the amount related to all other factors recognized in OCI.
Derivative Financial Instruments
The Company uses derivative financial instruments to enhance its ability to manage its exposure to certain
financial and market risks, primarily those related to changes in interest rates and foreign currency exchange
rates. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s variable-rate
borrowings. Cross currency swaps for various foreign currencies are entered into to manage foreign currency
exchange risk associated with the Company’s initial investments in certain foreign subsidiaries or certain
intercompany loans to foreign subsidiaries. Forward contracts on various foreign currencies are entered into to
manage foreign currency exchange risk associated with the Company’s forecasted foreign currency denominated
sales or purchases. The Company’s policy is to minimize its cash flow and net investment exposures related to
adverse changes in interest rates and foreign currency exchange rates. The Company’s objective is to engage in
risk management strategies that provide adequate downside protection.
Derivative financial instruments are entered into for periods consistent with related underlying exposures
and do not constitute positions independent of those exposures. The Company applies strict policies to manage
each of these risks, including prohibition against derivatives trading, derivatives market-making or any other
speculative activities. Although certain derivatives do not qualify for hedge accounting, they are entered into for
economic hedge purposes and are not considered speculative. The Company is monitoring the financial stability
of its derivative counterparties. Certain of these counterparties received support from the federal government in
the recent past due to difficult financial conditions. Although these counterparties remain highly-rated (in the “A”
category or higher), their ability to satisfy their commitments may be dependent on receiving continued support
from the federal government.
The Company designated interest rate swaps as cash flow hedges of forecasted interest rate payments related
to its variable rate borrowings and certain of the cross currency swaps as foreign currency hedges of its net
investment in a foreign subsidiary. During 2009, certain of the Company’s interest rate swaps ceased to be highly
effective and the Company discontinued hedge accounting for the affected derivatives. Additionally during 2009,
certain other interest rate swaps were de-designated from receiving hedge accounting treatment. Other cross
currency swaps and forward contracts on various foreign currencies did not qualify or have not been designated
as accounting hedges and do not receive hedge accounting treatment.
As required, derivative financial instruments are recognized in the Company’s Consolidated Balance Sheets
at their fair value. The Company’s derivatives are not exchange listed and therefore the estimated fair value of
derivative financial instruments is modeled in Bloomberg using the Bloomberg reported market data and the
actual terms of the derivative contracts. These models reflect the contractual terms of the derivatives, such as
notional value and expiration date, as well as market-based observable inputs including interest and foreign
currency exchange rates, yield curves and the credit quality of the counterparties along with the Company’s
creditworthiness in order to appropriately reflect non-performance risk. The Company’s counterparties also
provide it with the indicative fair values of its derivative instruments which it compares to the results obtained
using Bloomberg software. Considering Bloomberg software is a widely accepted financial modeling tool and
there is limited visibility to the preparation of the third-party quotes, the Company chooses to rely on the
Bloomberg software in estimating the fair value of its derivative financial instruments. Inputs to the derivative
pricing models are generally observable and do not contain a high level of subjectivity. While the Company
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