Note 11—Settlement Guarantee Management
The Company indemnifies its financial institution clients for settlement losses suffered due to failure of any other client to honor Visa-branded cards and payment products processed in accordance with Visa's operating regulations. This indemnification creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. Settlement at risk, or exposure, is estimated based on the sum of the following inputs: (1) average daily volumes during the quarter multiplied by the estimated number of days to settle plus a safety margin; (2) four months of rolling average chargebacks volume; and (3) the total balance for outstanding Visa Travelers Cheques.
The Company maintains and regularly reviews global settlement risk policies and procedures to manage settlement exposure, which may require clients to post collateral if certain credit standards are not met.
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.
