The efficient manage-ment of collateral is so critical to the core business of banking that it seems appropriate to question why a bank would consider outsourcing it. Part of the answer is that, according to bank and broker surveys, the fully allocated annual cost incurred by back offices for the selection, allocation, settlement and administration of collateral is estimated to be about $650,000 for every $1bn of transactions. Another part of the answer is that, as markets become more commoditised and margins tighter, the real proof of a bank's success is increasingly found in the efficient management of collateral. Although the US benefits greatly from reduced collateral management needs through netting, Europe's fragmented infrastructure and lack of a singk market means that moving and managing collateral efficiently across the various central securities depositories (GSDs) is operationally hazardous.
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