First Data 2011 Annual Report Download - page 54

Investment securities. The Company held $310.9 million and $429.3 million of investment securities as of December 31, 2011
and 2010, respectively. Approximately $170.5 million and $341.1 million of the Company's investment securities were SLARS as of
December 31, 2011 and 2010, respectively.
Due to the lack of observable market activity for the SLARS held by the Company, the valuation of the SLARS is highly
judgmental. The Company, with the assistance of a third-party valuation firm upon which the Company in part relied, made certain
assumptions, primarily relating to estimating probabilities of certain outcomes for the securities held by the Company and assessing
the risk factors inherent in each. All key assumptions and valuations were determined by and are the responsibility of management.
The securities were valued using an income approach based on a probability weighted discounted cash flow analysis. The Company
considered each security's key terms including date of issuance, date of maturity, auction intervals, scheduled auction dates, maximum
auction rates, as well as underlying collateral, ratings, and guarantees or insurance. Substantially all SLARS held by the Company
have collateral backed by the Federal Family Education Loan Program ("FFELP"). The probabilities of auction failure, a successful
auction or repurchase at par, or default by the issuer for each future period were forecasted. Default recovery rates were forecasted.
The Company assumed that the issuers will continue to pay maximum interest rates on the securities until the event of either a
successful auction or repurchase by the issuer, at par. To determine the fair value of each security, the weighted average cash flows for
each period were discounted back to present value at the determined discount rate for each security. The discount rates used in the
valuation were a combination of the liquidity risk premium assigned to the security (which ranged from 3.5% to 5%) plus the treasury
strip yield (zero coupon treasury bond) for the individual period for which a cash flow was being discounted. The liquidity risk
premiums on the SLARS have increased by 50 to 100 basis points from December 31, 2010 due to increasing spreads on asset backed
securities. A 50 basis point change in liquidity risk premium, as well as slight changes in other factors, would impact the value of the
SLARS by approximately $3 million.
As of December 31, 2011, the Company also held investments in short-term debt securities. Many of these securities are
considered cash equivalents. Prices for these securities are not quoted on active exchanges but are priced through an independent
third-party pricing service based on quotations from market-makers in the specific instruments or, where appropriate, other market
inputs including interest rates, benchmark yields, reported trades, issuer spreads, two sided markets, benchmark securities, bids, offers,
and reference data. In certain instances, amortized cost is considered an appropriate approximation of market value. Other investments
are valued based upon either quoted prices from active exchanges or available third-party broker quotes.
Changes in fair value of investment securities are recorded through the "Other comprehensive income" ("OCI") component of
equity with the exception of investment partnerships which are recorded through "Investment income" in the Consolidated Statements
of Operations. Regardless of investment type, declines in the fair value of the investments are reviewed to determine whether they are
other than temporary in nature. Absent any other indications of a decline in value being temporary in nature, the Company's policy is
to treat a decline in an equity investment's quoted market price that has lasted for more than six months as an other-than-temporary
decline in value. For equity securities, declines in value that are judged to be other than temporary in nature are recognized in the
Consolidated Statements of Operations. For debt securities, when the Company intends to sell an impaired debt security or it is more
likely than not it will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary-impairment ("OTTI")
has occurred. The impairment is recognized in earnings equal to the entire difference between the debt security's amortized cost basis
and its fair value. When 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. Refer to Note 7 to the Company's Consolidated Financial
Statements in Item 8 of this Form 10-K for additional information regarding the Company's Fair Value Measurements.
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
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