Note 11—Settlement Guarantee Management

The Company indemnifies its clients for settlement losses suffered due to failure of any other client to fund its settlement obligations in accordance with the Visa Rules. 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 was $67.8 billion for the period ended September 30, 2016, including Visa Europe, compared to $43.5 billion for the period ended September 30, 2015, which excludes Visa Europe. The increase in the Company's estimated maximum settlement exposure for the period ended September 30, 2016 is due to the Visa Europe acquisition. Of these amounts, $2.9 billion and $2.2 billion at September 30, 2016 and 2015, respectively, were covered by collateral. 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, 2016		September 30, 2015
	(in millions)
Cash equivalents	$	1,295	$	1,023
Pledged securities at market value	170		154
Letters of credit	1,311		1,178
Guarantees	1,418		971
Total	$	4,194	$	3,326

The balances above included collateral held by Visa Europe as follows:



	September 30, 2016
	(in millions)
Cash equivalents⁽¹⁾	$	294
Pledged securities at market value	—
Letters of credit	144
Guarantees	375
Total	$	813


⁽¹⁾	Cash collateral held by Visa Europe is not included on the Company's consolidated balance sheet as its clients retain beneficial ownership and the cash is only accessible to the Company in the event of default by the client on its settlement obligations.

Cash equivalents collateral, excluding cash collateral held by Visa Europe, 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 minimal losses, which has contributed to an estimated probability-weighted value of the guarantee of approximately $2 million and $1 million at September 30, 2016 and 2015, respectively. These amounts were reflected in accrued liabilities on the consolidated balance sheets.