First Data 2011 Annual Report Download - page 60

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates. The Company's assets include both fixed and floating
rate interest-bearing securities. These investments arise primarily from settlement funds held by the Company associated with the
official check business and merchant acquiring business. The Company invests these funds pending settlement. The Company has
classified these investments as available-for-sale. Accordingly, they are carried on the Company's Consolidated Balance Sheets at fair
market value. A portion of the Company's Integrated Payment Systems ("IPS") business involved the payment of commissions to
selling agents of its official check products and such commissions were generally computed based on short-term variable rates. The
continued wind-down of this business resulted in a decrease in its investment portfolio balance as well as a decrease in commissions
during the year ended December 31, 2011.
The Company's interest rate-sensitive liabilities are its debt instruments. The Company's senior secured term loan facility is
subject to variable interest rates. The Company has interest rate swaps on $5.0 billion of the variable rate debt that convert it to fixed
rates. Certain of the swaps will expire in September 2012. The Company entered into $5.0 billion notional forward-starting interest
rate swaps during 2011 and 2012 that will become effective upon expiration of the existing instruments and are intended to mitigate
exposure to fluctuations in interest rates and will expire in September 2016. In addition, during 2011, the Company entered into a
fixed to floating interest rate swap with a notional value of $750 million expiring in June 2019, related to its $750 million 7.375%
fixed rate notes. Therefore, as of December 31, 2011, the Company had approximately $7.0 billion of variable rate debt that is not
subject to a fixed rate swap and includes the fixed to floating interest rate swap noted above.
Using the December 31, 2011 balances, a 10% proportionate increase in short-term interest rates on an annualized basis
compared to the interest rates as of December 31, 2011, which for the three month LIBOR was 0.5810%, and a corresponding and
parallel shift in the remainder of the yield curve, would result in a decrease to pretax income of $3.4 million. The $3.4 million
decrease to pretax income (due to a 10% increase in variable rates as of December 31, 2011) is a combination of the following: a) $4.6
million increase in interest expense related to the Company's balance of variable interest rate debt, net of interest rate swaps, and b)
$1.2 million increase in interest income associated with operating cash balances, settlement related cash balances, and investment
positions. Conversely, a corresponding decrease in interest rates would result in a comparable increase to pretax income. Actual
interest rates could change significantly more than 10%. There are inherent limitations in the sensitivity analysis presented, primarily
due to the assumption that interest rate movements are linear and instantaneous. As a result, the analysis is unable to reflect the
potential effects of more complex market changes that could arise, which may positively or negatively affect income.
Foreign Currency Risk
The Company is exposed to changes in currency rates as a result of its investments in foreign operations, revenues generated in
currencies other than the U.S. dollar and foreign currency denominated loans. Revenue and profit generated by international
operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates.
A hypothetical uniform 10% weakening in the value of the U.S. dollar relative to all the currencies in which the Company's
revenues and profits are denominated would result in an increase to pretax income of approximately $11 million. The increase results
from an $88 million increase related to foreign exchange on intercompany loans and a $17 million increase related to foreign
exchange on foreign currency earnings. This increase is partially offset by an $84 million decrease related to a euro denominated term
loan held by the Company as well as a $10 million decrease related to three euro denominated cross-currency swaps held by the
Company, assuming consistent operating results as the twelve months preceding December 31, 2011. There are inherent limitations in
the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements are linear and instantaneous.
As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may
positively or negatively affect income.
Regulatory
Through its merchant alliances, the Retail and Alliance Services segment holds an ownership interest in several competing
merchant acquiring businesses while serving as the electronic processor for those businesses. In order to satisfy state and federal
antitrust requirements, the Company actively maintains an antitrust compliance program.
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