Visa 2013 Annual Report Download - page 107

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VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2013
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 increased
to approximately $53.8 billion at September 30, 2013, compared to $49.3 billion at September 30,
2012, as a result of continued growth in the Company’s business. Of these amounts, $3.0 billion and
$3.5 billion at September 30, 2013 and 2012, respectively, were covered by collateral. The decrease in
covered collateral was primarily due to a change in the composition of clients required to post collateral
based on the Company’s settlement risk policies. 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,
2013
September 30,
2012
(in millions)
Cash equivalents ............................................. $ 866 $ 823
Pledged securities at market value .............................. 256 307
Letters of credit .............................................. 1,191 1,084
Guarantees ................................................. 1,411 2,022
Total ....................................................... $ 3,724 $ 4,236
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 at September 30, 2013 and 2012. 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
Company’s derivative contracts outstanding in its hedge program were $1.1 billion and $690 million at
September 30, 2013 and 2012, respectively. The growth in the notional value of the Company’s hedge
99