Rebuilding a global settlement guarantee risk management framework

SITUATION

  • Mastercard’s settlement guarantee covers the payment network settlement obligations of issuers and acquirers to each other.

  • Mastercard’s legacy approach for management of exposure due to its settlement guarantee was based on:

    • Customers were assessed solely on financial ratings from major ratings agencies.

    • No collateral required if a customer’s rating was above a standard threshold, and 100% collateralization required otherwise.

    • Customer-level exposure was a factor only for customers from whom 100% collateral coverage was required.

  • Agency ratings could be slow to reflect unexpected changes in customer status or the environment they operated in.

  • 100% collateralization was a major pain point in many customer relationships.

  • Mastercard settlement risk team were process managers rather than risk managers, limiting opportunities and incentives for true ownership of risk management.

  • “Clean-sheet-of-paper” creation of a new exposure risk management framework was initiated.

APPROACH

  • Transformed risk management framework by incorporating risk best practices and governance protocols:

    • Customer-level exposure appetite established for each customer.

    • Collateral requirements based on any overage of actual exposure relative to appetite.

    • Regional risk teams owned ongoing responsibility for refreshing exposure appetites, monitoring exposure against these and updating collateral coverage as required.

  • Broad-scale communication of new approach, underlying rationale and associated benefits to business leadership, account management teams and to impacted customers.

Results

Risk management team became true underwriters and owners of exposure appetite and management rather than process operators reviewing agency ratings.

Identified $850M in excess customer collateral held, release of which alleviated a significant pain point in many customer relationships. 

New framework enabled significantly improved visibility of the size and quality of net exposure, both at the customer level and in aggregate at the country, regional and global levels.