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 CREDIT RISK
MANAGEMENT
FOR DERIVATIVES

Post-Crisis
Metrics for End-Users

Ivan Zelenko
Credit Risk Management for Derivatives
 Ivan Zelenko

Credit Risk
Management for
Derivatives
Post-Crisis Metrics for End-Users
Ivan Zelenko
Director, Market and Counterparty Risk
The World Bank
Washington, DC
USA

ISBN 978-3-319-57974-0 ISBN 978-3-319-57975-7 (eBook)

DOI 10.1007/978-3-319-57975-7

Library of Congress Control Number: 2017940380

© The Editor(s) (if applicable) and The Author(s) 2017

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction
on microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and
information in this book are believed to be true and accurate at the date of publication.
Neither the publisher nor the authors or the editors give a warranty, express or implied,
with respect to the material contained herein or for any errors or omissions that may have
been made. The publisher remains neutral with regard to jurisdictional claims in published
maps and institutional affiliations.

Cover illustration: © John Rawsterne/patternhead.com

Printed on acid-free paper

This Palgrave Macmillan imprint is published by Springer Nature

The registered company is Springer International Publishing AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To Brigitte, to Alexandrine and Maxime, knowing nothing is worth but
days spent among us
 Foreword

While derivatives have probably been in use long before the term
itself was coined, OTC instruments really came into wider knowledge
and usage during the 1980s. Since then, they have seen quite explo-
sive growth and have been employed for a variety of purposes. At
various times, they have also been viewed as useful instruments, sophis-
ticated means of risk management, and, occasionally, as weapons of mass
destruction especially in the aftermath of financial market crises. Partly,
this may be that although they are widely used, they are not always fully
understood.
In this remarkably lucid and timely book, Ivan brings his deep and
long expertise in the area to improve our understanding of these instru-
ments. He describes their use, provides an objective assessment of their
role during the financial crisis in 2008, and, most importantly, provides
a comprehensive exposition of the developments since that time cover-
ing the vast regulatory, market, institutional, and methodological dimen-
sions, including their relationships in a rigorous yet succinct manner.
Ivan shows that while derivatives did not cause the 2008 crisis, their
use and the institutional arrangements around their use may have ampli-
fied some aspects of the crisis both at the entity and systemic levels. He
skillfully draws on this insight to trace the origins of regulatory and insti-
tutional changes and the impact these have had on derivatives markets.
And even more interestingly, he shows how these changes themselves
may have unintended consequences and introduce new sources of risk.

vii
viii Foreword

With his strong technical background, Ivan walks the reader through
key methodological concepts and approaches to measuring the risks asso-
ciated with the use of derivatives, including measures of exposure as well
as the impact of netting, collateral, credit and debt value adjustments,
and the more recent measures for funding valuation adjustments and
capital value adjustments. Here, he not only provides the mathematical
formulas and their derivation but also describes in a clear manner the
purpose of the various measures and an intuitive interpretation of the
formulas. And in doing so, he does not shy away from describing the
limitations of some these new measures as well as the debates around
their meaning and usefulness. This will make the book appealing both
to the technically minded and to the participant who may want a more
practical understanding.
Ivan complements this technical discussion by weaving in the regula-
tory and institutional features of derivatives and the extraordinary market
developments since the 2008 financial crisis. For example, he addresses
the issues associated with market liquidity and borrowing costs, the
developments in the benchmark risk-free rates such as LIBOR and their
replacements, the development of CCPs and the impacts of initial margin
and variation margin.
This book will be useful to variety of audiences. Technical experts will
find a comprehensive review and summary, and for them the book will
serve as a useful reference. For those who feel they need a better under-
standing of the measures and uses of derivatives, this book will provide
an efficient way to become proficient in both the risk metrics and market
practices in the use of derivatives. Even for those not too familiar with
the markets and instruments, this could form a useful learning tool as
it is so lucidly written; the non-technical reader can even skip some of
the mathematical derivations and still absorb the key points and meas-
ures. Finally for those who have reached senior executive levels or for
board members responsible for risk, this book will bring them up to date
on developments in the derivatives market and enable them to ask the
right questions in the performance of their functions. This is in short a
valuable and highly readable contribution to the body of knowledge on
derivatives.

Lakshmi Shyam-Sunder
Vice President and World Bank Group Chief Risk Officer,
The World Bank, 1818 H Street, NW, Washington DC
 Acknowledgements

I feel deeply honored to serve at the Word Bank under Lakshmi Shyam-
Sunder, Vice President and World Bank Group Chief Risk Officer,
and Joaquim Levy, Managing Director and World Bank Group Chief
Financial Officer. I am deeply indebted to the Treasury, presently
under the leadership of Arunma Oteh, Vice President and World Bank
Treasurer, and to the Legal Finance team of the World Bank, for giv-
ing me, over a 12-year course, unmatched access to derivatives markets,
great collegiality and unforgettable conversations. I also thank all my
colleagues in the CRO Vice Presidency of the Bank for their relentless
drive to keep market and counterparty risks in check. I would like to
extend my warmest thanks to Bertrand Badré, Chief Executive Officer of
BlueOrange Capital and formerly World Bank Group Managing Director
and Chief Financial Officer. I would like to thank Afsaneh Mashayekhi
Beschloss, Graeme Wheeler, Madelyn Antoncic, and Kenneth Lay, who
have held the position of World Bank Treasurer over 2000–2015.

ix
 Contents

Reshaping Derivatives Markets: The Post-2008 Ambition  1

Outlining Counterparty Credit Risk Exposure  25

Restating the Role of Collateral  57

Adjusting for Credit and Debt Value: CVA and DVA  95

Expanding Valuation Metrics: FVA and KVA  141

Bibliography  
155

Index  
159

xi
 List of Figures

Reshaping Derivatives Markets: The Post-2008 Ambition 

Fig. 1 US and Euro area Real Growth Quarterly Data
June 1995–June 2016  2
Fig. 2 World GDP Growth (Annual %)  3
Fig. 3 USD Libor–Euribor 1-year basis swap spread  4
Fig. 4 Breaking Points during the 2007–2008 Crisis and Impact on
Libor-OIS 3-month Spread  6
Fig. 5 Evolution of Total Notional Amount of Outstanding
OTC Derivatives  15
Fig. 6 Segments of Global OTC Derivative markets and percentages
cleared on CCP or uncleared  17
Fig. 7 The negative US Dollar Swap Spread since September 2015  19
Outlining Counterparty Credit Risk Exposure 
Fig. 1 Derivative with 2-way payments among counterparties  27
Fig. 2 Example of a 5-year Interest Rate Swap  27
Fig. 3 Evolution of mark-to-market  29
Fig. 4 MtM evolution of a 2-year zero-coupon swap under
two rate scenarios  30
Fig. 5 OTC and Exchange Traded Derivatives outstanding amounts  31
Fig. 6 USD libor 3-month minus Generic US Treasury
Bill 3-month daily data February 1, 2002–April 8, 2016  39
Fig. 7 USD libor 3-month minus USD OIS 3-month rate daily
data February 1, 2002–April 8, 2016  39

xiii
xiv List of Figures

Fig. 8 EUR USD basis swap spread February 1, 2001

September 28, 2016 daily data  41
Fig. 9 USD OIS 3-month versus 3-month USD T-bill daily
data February 1, 2002–April 8, 2016  43
Fig. 10 Typical Counterparty Credit Risk Exposure for an Interest
Rate Swap (IRS)  46
Fig. 11 Typical Counterparty Credit Risk Exposure for a Currency
Swap (CS)  47
Fig. 12 EE and PFE at a future time t 48
Fig. 13 EE. EPE, Effective EE and Effective EPE  48
Fig. 14 Wrong-way risk in a Credit Default Swap (CDS)  51
Restating the Role of Collaterl 
Fig. 1 Additional flow of payments due to collateral calls
(or variation margins)  60
Fig. 2 Sequence of events in an unmet collateral call  66
Fig. 3 Sequence of events in a dispute on a collateral call  66
Fig. 4 Dealer bank borrowing and posting dollar cash collateral  70
Fig. 5 Asset Manager posting a US Treasury note as collateral  71
Fig. 6 Replacement Risk and PFE (Potential Future Exposure)  75
Fig. 7 Replacement Risk, PFE, and IA  76
Fig. 8 Replacement Risk when the MtM is negative at the time
of default  76
Fig. 9 Counterparty Exposure on posted collateral  77
Fig. 10 Circulation of collateral  78
Fig. 11 Borrowing cost induced by segregation  80
Fig. 12 Hedging strategy of a gold mining company (Ashanti)  81
Fig. 13 Phase-in of new margining regulatory requirements  90
Graph 1      Evolution of Total Outstanding Amounts in OTC
Derivatives and Collateral 67
Adjusting for Credit and Debt Value: CVA and DV 
Fig. 1 Evolution of the evolution of Expected Exposure over the
life of a portfolio  99
Fig. 2 Key elements of CVA calculation with collateral  103
Fig. 3 CVA calculation: Negative Expected Exposure on
posted collateral  104
Fig. 4 DVA calculation: Expected Exposure on received collateral  110
 List of Figures xv

Expanding Valuation Metrics: FVA and KV 

Fig. 1 Collateral funding (or non-funding) in a fully hedged
position 145
Fig. 2 Example of arbitrage in the presence of FVA and DVA
adjustments 148
Fig. 3 Expected Exposure and Expected Economic Capital  152
 List of Tables

Reshaping Derivatives Markets: The Post-2008 Ambition 

Table 1 Main Themes of Post-2008 Regulation—High-Level FSB
Reporting on Implementation  11
Table 2 OTC Derivatives. Evolution of Notional Amount Outstanding
and Gross Market Value  13
Restating the Role of Collatera 
Table 1 Threshold and Independent Amount rules for a
Swap End-User  63
Table 2 Composition of collateral received against non-cleared and
cleared transactions  69
Table 3 Report on Collateral Re-hypothecation Activity—Goldman
Sachs June 2015  72
Table 4 Margin calls and collateral posted by AIG  85

xvii
 Reshaping Derivatives Markets:
The Post-2008 Ambition

Abstract This Chapter looks back at the 2008 crisis, and at the destruc-
tive forces which, combined together, drastically amplified a dynamic of
excess lending and excess leverage to bring down the global financial sys-
tem and cause the worst economic crisis since 1929. Among them were
the opacity and complexity of OTC derivatives. At the G20, or through
major reforms like those in the US and in the EU, world leaders posed
the foundation of a new market framework with the ambition to de-risk,
stabilize and make derivatives markets transparent. Seven years through,
with much of this agenda implemented, the chapter reviews the unfin-
ished part, the unintended consequences and the new systemic threats.

Keywords Basel III · Credit risk · Crisis · Derivative markets

Dodd-Frank Act · EMIR · Financial stability · Leverage · Liquidity
OTC over-the-counter · Regulation · Securitization · Shadow banking
Swaps · Systemic risk

1  Derivatives as Mass Destruction Power

1.1   The Most Severe Crisis Since 1929

The 2007–2008 crisis only compares to 1929 in terms of severity, depth,
and long-lasting impact (Figs. 1 and 2). In 2016, 9 years after its start,
the legacy of the crisis still weighs on the world economy. The global

© The Author(s) 2017 1

I. Zelenko, Credit Risk Management for Derivatives,
DOI 10.1007/978-3-319-57975-7_1
2 I. ZELENKO

US Real GDP
10
Growth
8

2
In %

-2

-4 Eurozone Real
GDP Growth
-6 Last Quarter
2008
-8

-10
5
6
7

8
0
1

2
3
4

5
7
8

0
0
1

2
4
4

6
n-9
g-9

t-9
c-9
b-0
r-0
n-0
g-0

t-0
c-0
b-0

r-0
n-9
g-1

t-1
c-1
b-1

r-1
n-1
Oc

Oc

Oc
Ap

Ap

Ap
De

De
De
Ju
Au

Fe

Ju
Au

Fe

Ju
Au

Fe

Ju
Fig. 1 US and Euro area Real Growth Quarterly Data June 1995–June 2016.
Source Bloomberg

financial system may have been stabilized for the most part, but the US
Fed is only gradually and cautiously moving away from its highly accom-
modating monetary stance, while the ECB and the Bank of Japan remain
committed to negative rates and quantitative easing. In most Western
countries, the fall in tax revenues in the aftermath of the 2009 recession,
and the emergency spending by governments to rescue and stabilize their
banking sector, has brought public debt to historically high levels. The
return to “normal” in terms of growth and inflation remains an ongoing
concern.
Due to exceptional measures taken—low rates, quantitative easing,
and powerful regulatory tightening—and their subsequent very gradual
removal, there are still several “pockets” of global and derivative markets
that are not back to their “natural” equilibrium.
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION 3

1930-33 2009
0
1961-69 1970-79 1980-89 1990-99 2000-08 2010-15

-2

-4

-6

-8

Fig. 2 World GDP Growth (Annual %). Source World Bank Annual Data from
1961; JP Morgan

For instance, currency basis swap spreads, which should normally be

close to zero but had widened to abnormal levels in 2007 when non-US
banks were in urgent need of US dollar liquidity, have not yet reverted
back to their equilibrium level (see for instance the 1-year USD Libor–
Euribor basis spread in Fig. 3). As of November 2016, the dollar–yen
Libor basis spread is in the 60 basis points area and the US dollar Libor–
Euribor basis is around 40 basis points.
A major reason for the severity and length of the 2008 crisis lies in the
sharp, wide-scale, and damaging banks’ losses. Should the banking sec-
tor be seriously hurt, a financial crisis would have a long-lasting impact,
because the financing of the economy is impaired: financial stress that is
rooted in the banking sector typically has more adverse economic effects than
stress in stock markets or exchange rates.1 In spite of the prominent role
it gives to capital markets, the global financial system still heavily relies
on banks, either as lenders or as broker dealers. At the same time, the
growing concentration in the banking sector over the past 30 years has
4 I. ZELENKO

EUR -USD 1-year Libor Euribor basis swap

140

120

100

80

60

40

20

0
01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16
b-

b-

b-

b-

b-

b-

b-

b-

b-

b-

b-

b-

b-

b-

b-

b-
Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe

Fe
-20

Fig. 3 USD Libor–Euribor 1-year basis swap spread. Source Bloomberg, daily
data, in basis points

seemingly constituted an irreversible structural evolution. Yet, the emer-

gence of a small set of large universal banks, operating on a global scale,
and, in view of their role, having become “systemic” or “too-big-to-
fail” has become a key vulnerability of the system. These banks, grouped
with the “Systematically Important Financial Institutions” (SIFIs) have
become a going concern for economic authorities and regulators.
2007–2008 also compares to 1929 in terms of the magnitude and
scope of the governmental response: the re-regulation undertaken since
2009, initiated by the G20 2009 Meeting in Pittsburgh (see Sect. 1.3).

1.2   The Cause: New Destructive Forces Add to Excess Leverage

Financial crises tend to follow a generic path, first outlined by the econo-
mist Hyman Minsky in 1975. At the onset, an innovation or a new busi-
ness model appears and gives birth to an active and buoyant market; this
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION 5

new market then attracts many investors and enjoys a strong growth; at
a second stage though, there is excess, caused by the attractiveness of
this market: excess risk taking, excess search for return; at a further stage,
new investments are no longer viable: it is not known immediately to
market participants, and investment continues unabated; but this non-
viability is eventually revealed: A panic sell-off occurs with all investors
attempting to exit at the same time while suffering heavy losses.
The business model, created around 2000, sometimes referred to
as: originate and securitize, consisted in granting loans to many differ-
ent borrowers, pooling a large enough number of these loans to benefit
from diversification, then making the pool the assets of a new financial
entity, a Special Purpose Vehicle (SPV), which would issue notes of vari-
ous ratings and credit risk profiles (structured notes) based on the pool.
Lightly regulated, these SPVs were performing the traditional functions
of a bank, but outside of the balance sheet and of the regulatory frame-
work of a bank; they were a key actor of shadow banking. As described
by Minsky, shadow banking followed the fatal path to excess; loan secu-
ritization, implemented in vast amounts, more and more rapidly, and
with less and less care, went far beyond the viability line. A name was
coined with the riskiest product: subprime or structured note backed by
suprime loans.
The non-viability was eventually revealed in August 2007, when a
fund declared itself unable to honor a redemption because of an “evap-
oration of liquidity”. Rather than with a massive sell-off and price fall,
investors were this time confronted with the total disappearance of
liquidity, a total paralysis of the loan securitization market: There was no
longer any counterparty willing to buy securitized loans. Paralysis was
coming not only from fear, but also from the complexity and opacity of
the products.
With the securitized loan sector paralyzed, investors turned to the
banks that had sold them the products. Strongly committed to their
client relationship, and thereby forced to repurchase, banks started re-
intermediating securitized loans, and, more worryingly, their risk. Soon
enough, the fear, the opacity, and complexity of the securitized prod-
ucts caused liquidity to dry out in the interbank borrowing market: Each
bank’s creditworthiness was being reassessed. Even as central banks were
providing emergency liquidity, a number of several large dealer banks
were being suspected of being insolvent.
6 I. ZELENKO

USD Libor 3-month minus OIS 3-month Source Bloomberg, daily data

Lehman
Bankruptcy
Sep 15 2008

Euro
Sovereign
Liquidity Crisis
Freeze August 2011
Aug 8
2007

Fig. 4 Breaking Points during the 2007–2008 Crisis and Impact on Libor-OIS
3-month Spread. Source Bloomberg, daily data

At the very moment banks were becoming concerned with their abi­lity
to fund themselves, another major vulnerability surfaced, the consequence
of years of large-scale excess leverage by banks. Looking to maximize
profit, banks were funding the assets with short-term wholesale funding,
from other banks or fund managers, using secured (repos) or unsecured
borrowing (commercial paper or Libor unsecured interbank borrowing).
The classic run on deposits following the loss of trust in a bank took a new
form: Banks were seeing investors running away from all their funding
instruments, be they repos or interbank loans. Several banks experiencing
severe runs had to be taken over by other banks or by the government.
One among them, Lehman Brothers, for lack of rescue, filed for bank-
ruptcy on September 15, 2008. Because of Lehman’s systemic role in
the financial market architecture, this precipitated the crisis to a deeper
level. In particular, Lehman was a major dealer in the over-the-counter
(OTC) derivative market. By their very definition, OTC derivatives are
bilateral, idiosyncratic, and often innovative contracts. The unwinding
of all Lehman positions and of all the collateral posted or received, and
most often re-pledged by Lehman, created unprecedented disorder and
turmoil in global financial markets (see Fig. 4).
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION 7

1.3   The Culprits: Opacity, Complexity, and Derivatives

In 2007, OTC derivatives represented the overwhelming majority of
derivatives. The latest big innovation, credit derivatives, was at the very
heart of the crisis. Credit derivatives were comprised, for the most part,
of credit default swaps (CDS) and of collateralized loan/debt obligations
(CLOs/CDOs), the structured securitization products that had gener-
ated and facilitated the excess search for yield.
Saying they were at the heart of the crisis does not mean, however,
that they were, by themselves, the cause of the crisis. In 2008, testifying
before a US Senate Committee, the economist Darrell Duffie was declar-
ing: “it is natural to think of credit derivatives as devices that enabled
investors to transfer to each other the losses as they occur, rather than
the cause of the losses in the first instance.”2
There is still a specific danger created by OTC derivatives, which
may fundamentally reside in their over-the-counter, bilateral, private, and
therefore opaque nature. This opacity has two harmful consequences:

• It is impossible for market participants, let alone market supervi-

sion authorities, to have an accurate measure of the exposure of
market participants—in particular of large SIFIs—and of the over-
all market, to a particular class of products or risks: The main risk
building up in the period prior to 2007 was clearly the US real
estate risk but since most of the exposure was through OTC deriv-
atives, and in the shadow banking domain, it was impossible to
measure;
• In a situation of bankruptcy, and most especially when the failing
entity is a large bank, a SIFI, it is extremely difficult to plan for an
orderly unwinding of all bilateral positions—together with the asso-
ciated collateral—contracted in the form of OTC derivatives. This
is due as much to the idiosyncrasy of each position, as to their bilat-
eral nature: No central counterparty can be used to centralize the
unwinding process.

Accordingly, the statement of the G20 Meeting in Pittsburgh in

September 2009, Strengthening the International Financial Regulatory
System, was making improving of OTC derivatives markets one of its four
priorities for a major reform of the system, with a program centered on
central clearing3:
8 I. ZELENKO

Box 1: Final Statement of the G20 24–25 September 2009 Meeting:

Improving OTC Derivatives Markets
All standardized OTC derivative contracts should be traded on
exchanges or electronic trading platforms, where appropriate, and
cleared through central counterparties by end-2012 at the latest. OTC
derivative contracts should be reported to trade repositories. Non-
centrally cleared contracts should be subject to higher capital require-
ments. We ask the FSB and its relevant members to assess regularly
implementation and whether it is sufficient to improve transparency
in the derivatives markets, mitigate systemic risk, and protect against
market abuse.

In what follows we first take stock of the effort to regain control over the
global financial system and of what has been implemented so far, seven
years after Pittsburg; we will then turn to the analysis of the effects, to the
extent they can be perceived and analyzed over a short period of time.

2  Regaining Control

2.1   The Post-2008 Regulatory Agenda

Soon after the G20 Pittsburgh, the highest rule-making instances in
finance worldwide proceeded with turning the G20 list of recommenda-
tions into concrete and executable rules.
In July 2010, the US Dodd-Frank Act or Wall Street reform and
Consumer Act was signed into law. In December 2010, the Basel
Committee for Banking and Supervision (BCBS) published the new
Basel III framework. Meanwhile, having adopted, as early as September
2009 proposals to strengthen financial regulation, the European
Commission (EC) formally launched, in April 2010, the consultation
process for revising its core document, the 2004 Markets in Financial
Instruments Directive (MiFID). In July 2012, the EC adopted the
European Market Infrastructure Regulation (EMIR), dealing mostly
with OTC derivatives and the requirement to use central clearing coun-
terparties (CCPs). The MiFID II entered into force in July 2014.
The Dodd-Frank Act contained an extensive section dealing with
OTC derivatives: mandatory clearing of all standardized swaps on
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION 9

CCPs and mandatory reporting to trade repositories (TRs)—an agenda

also conveyed by the European EMIR; mandatory margining rules for
uncleared swaps (i.e. swaps not cleared on CCPs) together with a sig-
nificant tightening of existing collateral practice (see chapter Restating
the Role of Collateral on collateral): Rules, in their final form, have been
published in the USA in September 2016; similar rules are being final-
ized, as of November 2016, by EU regulatory agencies; Dodd-Frank
also requested the mandatory trading of swaps on exchanges or Swap
Execution Facilities (SEFs) when available;
The Dodd-Frank Act was also addressing several key aspects of the cri-
sis: the so-called Volcker Rule was attempting to reestablish a strict sepa-
ration between: (i) activities banks were pursuing for their clients, as pure
brokers, pure market intermediaries; and (ii) trading activities for their
own account (proprietary trading), which was proscribed or had to be
run in a separate entity. Capital and liquidity requirements were tight-
ened by Dodd-Frank, as were, leverage and short-term borrowing limits.
SIFIs were asked to adopt resolution plans or living wills. The surveil-
lance of hedge funds and of securitization vehicles (shadow banking) was
strengthened. A framework regulating the compensation of bank execu-
tives was established.
Basel III strengthened the Regulatory Capital Requirements of Basel
II and introduced three new ratios, added to the capital adequacy ratio
as new cornerstones of bank stability destined to reinforce the liquidity
of banks and preempt excess leverage.4 Basel III introduced new tools
meant to “reduce procyclicality”: forward looking provisioning (based
on future expected loss), capital buffers, and a capital surcharge left to
the discretion of supervisors as macroprudential tool, so as to prevent
credit from growing to excessive levels. Moreover, in dealing with sys-
temic risk, Basel III imposed additional capital charges to SIFIs. Basel III
also introduced new capital requirements for derivatives: for uncleared
OTC derivatives (an incentive to use CCPs), for wrong-way risk, and for
the impact on income of CVA volatility.
The overall spirit of the Pittsburgh agenda was to significantly
strengthen the global financial system, increase its resilience and its trans-
parency, and enhance the power of supervision while, at the same time,
keeping the effectiveness brought by well-functioning, open, and inte-
grated markets. We may be about to enter into a new phase of amend-
ments to the post-crisis regulation. The US Treasury Secretary, Steve
Mnuchin, wants to act on the Executive Order signed by President
10 I. ZELENKO

Trump on February 3, 2017 and remove parts of Dodd-Frank which

inhibit banks from lending. But, while it is too early to analyze the ful
scopes of these potential reforms, it seems that the essential features of
the reframing of derivatives markets should remain unchanged.

2.2   The Implementation: Seven Years After Pittsburgh

Let us now look at the implementation of the post-2008 regulatory
agenda. In its first Report to the G20 on the implementation and effects of
the G20 financial regulatory reforms, published in November 2015, the
Financial Stability Board (FSB) gathers the reform agenda around four
main themes (see Table 1):

• Strengthening of Financial Institutions (FIs) via new Basel III rules:

reinforced capital requirements, new liquidity, and leverage ratios;
• Ending too-big-to-fail: applying stronger requirements to SIFIs,
establishing orderly resolution regimes to avoid both the tempta-
tion to bail-in or the systemic disruption a la Lehman;
• Making derivatives markets safer, enhancing the structure (CCPs,
margining rules) and the transparency (TRs);
• Building a regulatory framework for the shadow banking sector.

The FSB report also identifies areas that merit ongoing attention at the
senior level:

• The implementation in Emerging Markets (EMs) as well as the

impact of the deployment of the post-2008 regulation for EMs, and
notably through the spillovers from the implementation in their
home jurisdiction of the new framework by global FIs;
• The limited pool of official sector resources for carrying out the
reform agenda;
• The need to maintain an open and integrated global financial
system: the FSB, the International Financial Institutions (IFIs), and
regulatory bodies monitor the risk of retrenchment in international
financial activities and work to maintain an open system;
• The concern with market liquidity, which has been raised by mar-
ket banks: The FSB sees mixed evidence at these points and contin-
ues to analyze “the causes and financial stability consequences of any
shifts in market liquidity.”
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION
Table 1 Main Themes of Post-2008 Regulation—High-Level FSB Reporting
on Implementation
THEMES
Strengthening Financial
Institutions (FIs)
Ending “too-big-to-fail”
Framework for
Systematically Important
Financial Institutions (SIFIs) Effective Resolution
Making Derivatives Markets OTC Derivatives Markets
more transparent and safer
Transforming Shadow
Banking into resilient
market-based finance
11
KEY TOPICS FSB 2015
IMPLEMENTATION
REPORT
Basel III agenda Implementation of Basel
Stronger Capital III capital and liquidity
Requirements standards has generally
New Liquidity and Leverage been timely and consistent
Ratios with the Basel framework
Regulatory Framework for in most jurisdictions. Banks
Compensation remain on track to meet
these standards. Regulatory
frameworks for compensation
have been adopted in almost
all countries
Stronger Capital & Liquidity Implementation of the policy
Requirements framework—which consists of
More intensive supervision higher loss absorbency, more
intensive supervision and
Regimes key attributes of effective
resolution—has advanced the
most for global systematically
important banks. However,
substantial work remains
in implementing effective
resolution regimes
Implementation of over-the-
Reforms counter (OTC) derivatives
Central Clearing (CCPs) reforms is well underway,
Margining Rules although it continues to be
Trade Repositories uneven and behind schedule.
Progress is most advanced
in the largest derivatives
markets. Trade Repositories
(TRs) and central counter-
parties are increasingly used
Framework for lightly regu- A number of policies were
lated entities recently finalised in this area
Hedge Funds, Money (e.g. money market funds,
Market Funds risk alignment of securitiza-
Securitization markets tion) so implementation is
generally at an early stage
12 I. ZELENKO

Moreover, the FSB asks for support from G20 Leaders to overcome the
following implementation challenges:

– Removing legal barriers to the reporting of OTC derivatives to TRs

and to the opening of such reporting to supervisors;
– Promoting cooperation to address duplication of requirements to
cross-border derivatives transactions;
– Putting in place legal powers to make foreign resolution actions
effective;
– Ensuring that supervisory authorities are adequately resourced.

In sum, the implementation of the Basel III agenda for stronger capital
requirements, and for the new liquidity, funding and leverage ratios, has
been steadily progressing; the case for managing the systemic risk of SIFIs
has advanced, even if resolution regimes are still being implemented
within local jurisdictions; on the other hand, the definition of a regula-
tory framework for the shadow banking sector remains at an early stage.
When it comes to OTC derivatives, the picture is contrasted. CCPs
have been implemented for essential segments of OTC derivative trading.
Margining regulations are being put into place, with the September 2016
start date in the USA, and implementation in the EU reaching its final stage.
But there seems to be challenges in the extension of the area covered by
CCPs, and in the transparency agenda pursued via TRs. Meanwhile, swap
exchanges or Swap Execution Facilities still constitute a remote objective.

2.3   The Impact: Curbing Derivatives Credit Risk

Designing and implementing a new and effective regulation for OTC
derivative markets, while preserving their flexibility and their innovative
power, may have seemed, at first, an insurmountable task for policy mak-
ers. Today, as of June 2017, looking at what has already been accom-
plished, and at the already tangible benefits, one can reasonably speak of
a great achievement, a major step taken in stabilizing derivative markets
and the global financial system altogether.
The majority of OTC trading in interest rate swaps (IRSs) and in for-
ward rate agreements, the most standard but also the most widely used
products in OTC derivatives markets, has moved to CCPs. As of June
2016, 80% of OTC IRSs and 92% of OTC FRAs were cleared with
CCPs. These two categories of OTC derivatives represented 74% of all
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION 13

OTC derivatives at end-June 2016 (see Table 2). As a result, 62% of

all OTC derivatives (i.e., of the total notional amount outstanding) is
cleared in CCPs.
The benefit of having such a large proportion in CCPs is straightfor-
ward. When they face the CCP, swap users are protected against the risk

Table 2 OTC Derivatives. Evolution of Notional Amount Outstanding and

Gross Market Value. Source BIS OTC Derivatives Statistics at end-June 2016

In trillions of Global OTC Derivatives Markets Cleared

US dollars

Source: BIS Notional Amounts Gross Market Value with CCPs

end-June 2016 Outstanding

end-June end-June end-June end-June end-June

2010 2016 2010 2016 2016
Grand Total 582.7 544.1 24.7 20.7 62%
Interest Rate 478.1 437.8 18.5 16.0 75%
Contrats
Forward Rate 60.0 74.7 0.2 0.4 91%
Agreements
(FRAs)
Interest Rate 367.5 327.4 16.7 14.2 80%
Swaps (IRSs)
Options 50.5 35.4 1.6 1.4 0%
Foreign 63.0 85.7 3.2 3.6 <2%
Exchange
Contracts
Forwards and 31.9 46.9 1.3 1.7
Swaps
Currency 18.9 25.9 1.4 1.6
Swaps
Options 12.1 12.9 0.5 0.3
Credit 31.4 12.0 1.7 0.4 37%
Derivatives
Credit Default 31.1 11.9
Swaps (CDSs)
Other 0.3 0.1 1.7 0.4 37%
Equity-Linked 6.9 6.8 0.8 0.5 <2%
Contracts
Commodity 3.3 1.8 0.5 0.3
Contracts
Gross Credit 3.6 3.7
Exposure
14 I. ZELENKO

of default of their swap counterparty. Given that swap dealers are coun-
terparties to practically all trades, the financial system is protected against
the risk of contagion following the default of a dealer bank. Lastly, the
financial system’s transparency is enhanced since the majority of trades
are booked with the CCP.
The post-crisis regulation has already exerted a profound impact on
OTC derivative trading and on the management of credit risk by dealer
banks. What long looked as an ineluctable increase in the volume and the
credit risk of derivatives has been curved.
The total notional amount of outstanding OTC derivatives, the well-
known emblematic statistic of the BIS, which has been exponentially
increasing in the hundreds of trillion dollars, has peaked at $711 trillion
in 2013 and then moved down to $493 trillion at the end-2015 (see
Fig. 5). New capital, liquidity, and margining requirements have given
dealers a strong incentive to reduce their swap books. Two dealers facing
each other can net out a lot of positions and thus considerably reduce
the number of derivative trades among them. This practice is called
trade compression. They are helped by service providers such as the firm
TriOptima, which run algorithms on derivative books and offer both
parties to reduce their respective books while keeping the same market
value and position.
Gross market value, which measures counterparty credit risk with the
Mark-to-Market of the position, but before the application of bilateral net-
ting agreements, and before collateral, has also gone down between end-
June 2010 and end-June 2016 (from $24.7 to $20.7 trillion, see Table 2).
Gross credit exposure, which reflects the impact of bilateral netting agree-
ments, has stayed practically constant, going from $3.6 to $3.7 trillion.

3   A Still Uncomplete Reshaping

3.1   The Limitations of the New Framework

The Pittsburgh agenda had the clear ambition of addressing the com-
plexity and the opacity of OTC derivative markets.
First, and in priority, through the centralization of clearing on CCPs,
with the additional incentive of strengthened margining rules for
uncleared derivatives. Second, and as imperatively, through the centrali-
zation of trading information on trade repositories (TRs). Third, and to
the extent possible, through the very centralization of trading, on Swap
Execution Facilities (SEFs).
 RESHAPING DERIVATIVES MARKETS: THE POST-2008 AMBITION 15

OTC and Exchange traded Derivatives

$ Trillion Gross Notional Outstanding

800
OTC
700 Derivatives

600

500

400

300 Exchange traded

Derivatives
200

100

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

OTC D erivatives and Collateral Amounts

Source: ISD A BIS
4,500 800

4,000 700
3,500 OTC Derivatives 600
$ trillion, right scale
3,000
500
2,500
400
2,000
300
1,500
Collateral
$ billion, left scale 200
1,000

500 100

- 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

OTC Derivatives Gross Notional

$ Trillion Outstanding

800 $711 Trillion

in December 2013
700

600

500

400
$493 Trillion in
December 2015
300
$544 T rillion in June 2016
200

100

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Fig. 5 Evolution of Total Notional Amount of Outstanding OTC Derivatives.

Source BIS September 2016 Triennial Survey (Annual Data)

BIS OTC Derivatives Statistics at end-June 2016

16 I. ZELENKO

At present, CCPs have become an essential focal point in deriva-

tives markets. In Sect. 2.3, we saw how much of OTC derivative trad-
ing is now covered by CCPs, among which are well-established firms like
LCH. Clearnet and CME, which are competing for the bulk of the clear-
ing business.5
TRs have also been able to extend their data collection outreach. In
a November 2015 report,6 the FSB listed 27 TRs or TR-like entities
worldwide, including DTCC, ICE, CME, and Unavista (the latter two
being associated with and thus able to collect data from CME and LCH
Clearnet).
Yet, although TRs can gather most of the information on OTC deriv-
ative trading in terms of post-trade data, the financial system (includ-
ing regulators, analysts, or economists) seems unable to extract the full
value of this extensive information. At this point therefore, one may say
that the complexity of derivative markets trumps the comprehensiveness
achieved in collecting trading data and makes full transparency a still dis-
tant if not elusive goal. In his June 2016 report presented at the ECB7 in
June 2016, the economist Darrell Duffie deplored the lack of a relevant
framework to analyze trading collected in TRs, to organize them, and
give them a meaning in a systemic risk preemption perspective.
Also, beyond the cognitive and analytical challenge, the FSB report
points at the institutional obstacles to effective reporting: (i) the spread-
ing of data across several jurisdictions for foreign exchange trades;
(ii) the legal barriers to full access to data.
An example of such institutional barriers is the status given to FX
swaps and FX forwards by the US Treasury in November 2012, exempt-
ing them from mandatory clearing and margin requirements.8
The area covered by the new regulation is also limited by the nature
of market participants. For instance, under Dodd-Frank:

– a “Swap Dealer” (SD) and a “Major Swap Participant” (MSP) are

subject to mandatory central clearing and to margining rules (with
both initial and variation margin—see Chapter Restating the Role
of Collateral on Collateral).
– But non-financial users are exempt: “The final rules would establish
initial and variation margin requirements for SDs and MSPs but
would not require SDs and MSPs to collect margin from nonfinancial
end users.”9
Another random document with
no related content on Scribd:
House adorned with the Queen’s statue.
It has been seen[334] that the house adjoining Rivers House on the
east was built in 1637. Although not certain, it seems very probable that the
first occupant was the Earl of Northumberland. It is known that
Northumberland’s house adjoined Conway House,[335] the next in order to
the east from that which is here in question, but there is no definite
evidence as to whether it lay to the east or west of it. It would, however,
seem that the house to the east was not built until 1640,[336] and as
Northumberland was certainly in residence in Great Queen Street in 1638 it
follows, if the assumption be correct, that his house adjoined Conway House
on the west.
Algernon Percy, tenth Earl of Northumberland, was born in London
in 1602, and succeeded to the title in November, 1632. He was much
favoured by Charles I., who was most anxious to secure his support, and
who, as the king himself afterwards declared, “courted him as his
mistress.”[337] He received the Order of the Garter in 1635. In 1636, and
again in 1637, he was appointed admiral of the fleet raised by means of ship
money. In March, 1638, he was made Lord High Admiral of England; in
July of the same year he was placed on the committee for Scottish affairs;
and in the following March was appointed general of the forces south of the
Trent and a member of the Council of Regency. He had taken up his
residence in Great Queen Street some time before November, 1638, for,
beginning in that month,[338] there are many letters extant, written by him
or on his behalf, headed “Queen Street,” “Earl of Northumberland’s house
in Queen Street,”[339] “My house in Queen Street.”[340] The last that has
been discovered is dated 10th June, 1640.[341] In February of the latter year
he was appointed general of the forces raised for the second Scottish War,
but he fell ill in August and his place was taken by Strafford. Always
dissatisfied with the king’s policy, Northumberland showed himself more
and more in sympathy with Parliament as the conflict drew near, and his
position secured to the parliamentary leaders the control of the navy, his
dismissal by the king in June, 1642, coming too late. From this time until
the king’s death, Northumberland conscientiously acted the role of
peacemaker. He strongly opposed the king’s trial and after its tragic
conclusion, held entirely aloof from public affairs. On the Restoration he
was sworn a member of the privy council, and was appointed lord-
lieutenant of Sussex and of Northumberland, but took no part in politics.
He died in 1668.
Whichever of the houses on either side of Conway House formed the
Earl’s residence, he had left it before the end of 1641, for according to a
deed[342] of 20th December in that year, the house to the east of Conway
House was then in the occupation of the Countess of Essex, while that on
the west, with which we are here concerned, was occupied by the “Lord
Awbyney.”
George Stuart, ninth seigneur D’Aubigny, was the fourth son of
Esmé, third Duke of Lennox. He married Catherine Howard, eldest
daughter of the second Earl of Suffolk.[343] On the outbreak of the Civil War
he embraced the royal cause, and was slain at Edgehill in October, 1642.
The exact period of his residence in the house in Great Queen Street
is uncertain. Assuming that the Earl of Northumberland was the previous
occupant, D’Aubigny must have entered into occupation some time between
May, 1640, and December, 1641. Some ground for assuming that he had at
the latter date quite recently taken up his residence here may be found in
the fact that in a deed dated 31st July, 1641,[344] relating to Rivers House,
the premises mentioned as the eastern boundary are simply referred to as “a
new messuage where the statue of the Queenes Majestie is placed,” without
any occupant’s name being given. This detail is, on the contrary, given in the
case of the western boundary of the property, and it seems likely that the
omission in the former case is due to the fact that the house was then
unoccupied. Too much weight, however, cannot be assigned to the
argument.
The next mention of the house is in October 1645, when it was in the
occupation of Colonel Popham.[345] From the following, dated 24th
February, 1653, it would appear that either before 1645, or between then
and 1653, Lord Montagu had acquired an interest in the house. “Upon
hearing of Colonel Alexander Popham, a member of Parliament, concerning
the house which he holds from ye Lord Mountague scituate.... It is ordered
that ye said Colonel Popham doe pay ⅔ of the rent due for ye said house to
ye use of ye Commonwealth which is sequestered for the recusancy of the
said Lord Mountague.”[346] Afterwards Lord Montagu himself resided at the
house, the Hearth Tax Rolls for 1665, 1666 and 1673 giving his name in
respect of the premises.[347]
Francis Browne, third Viscount Montagu, the only son of Anthony
Maria Montagu, the second Viscount, was born in 1610, and succeeded to
the title in October, 1629. He died in November, 1682.[348] The Hearth Tax
Roll for 1675 shows Lady Montagu[349] at the house.
The next occupant whose name is known was “Lord Dilleage,”[350] of
whom nothing can be found.
In two much later documents[351] it is stated that before the division
of the house into two it formed the residence of the Marquess of Normanby,
and the Jury Presentment Roll for 1698 shows the Marquess in occupation
of the house in that year. This was John Sheffield, son of Edmund Sheffield,
second Earl of Mulgrave. He was born in 1648, and succeeded to the
earldom ten years later. He saw both naval and military service during the
reign of Charles II., and in 1680 commanded an expedition for the relief of
Tangier. With James II. he was in high favour. At the Revolution he quietly
submitted, but was for several years in opposition to the court party. In
1693–4 he showed signs of a desire to support the government, and in May,
1694, was encouraged in his attitude by being created Marquess of
Normanby. Two years later, however, he resumed his policy of opposition.
On the accession of Anne he was at once taken into favour and appointed
Lord Privy Seal. In March, 1703, he was made Duke of Buckingham and
Normanby, and later on was appointed one of the commissioners to arrange
the treaty of union with Scotland. In 1710 he became Lord President of the
Council. On the arrival of George I. he was removed from all his offices. He
died in February, 1721, at Buckingham House, St. James’s Park.
He was not only a munificent patron of literature,
Dryden and Pope particularly being under obligations to him,
but also himself an author. Chief among his writings were:
Essay on Poetry, Essay on Satire, Account of the Revolution.
Mention should also be made of his extraordinary revision of
Julius Cæsar, which he broke up into two plays and rewrote,
and into which he introduced love scenes.
Sheffield.
The period of his residence at the house in Great
Queen Street cannot be exactly determined. He was not there
in 1683, but a letter from him (as Lord Mulgrave) to Dykevelt, headed
“Queen Street,” dated, “March 8th,” and assigned to the year 1691,[352]
affords some evidence towards limiting the date of the beginning of his
occupation. His removal from the house seems to lie between 1698 and
1700, the ratebook for the latter year having no entry in respect of the
house.
In 1702 the house was purchased of William Withers by Robert Lane
and Jonathan Blackwell,[353] apparently on behalf of their brother, Ralph
Lane, an eminent Turkey merchant. Lane divided the house, letting off the
portion fronting the street, and reserving for his own use that in the rear.
This he used as his own house[354] until his death in 1732. By his will,[355]
dated 15th June, 1726, he left his “two messuages or tenements” in Great
Queen Street to his wife Elizabeth for her widowhood, and the reversion to
his brothers in trust for his daughters, the Lady Parker[356] and Byzantia.
[357] A codicil of 6th July, 1728, however, revoked this and settled the
property on his wife absolutely.
The widow is shown in the ratebooks as occupying the house from
1733 to 1753 inclusive. She died in March, 1754, leaving[358] her “two
freehold messuages scituate in Great Queen Street ... one of them being in
[her] own occupation, and the other adjoyning thereto, in the occupation of
Mr. Hudson,” to her grandson, George Lane Parker, the younger son of her
daughter and the Earl of Macclesfield.
 In 1764 Parker sold[359] both of the houses to Philip Carteret Webb,
who was already in occupation of the house in the rear, having, in fact,
succeeded Mrs. Lane in the year in which she died.
Philip Carteret Webb was born about 1700. In 1724 he was admitted
attorney-at-law, and soon acquired a great reputation for knowledge of
records and of precedents of constitutional law. He was employed in
connection with the prosecution of the prisoners taken in the rebellion of
1745, and in that of John Wilkes. For his share in the latter he incurred
great obloquy, culminating in 1764 in a trial for perjury, in which, however,
the jury returned a verdict of “Not guilty.” When in January, 1769, he was
charged in the House of Commons with having used the public money to
bribe witnesses against Wilkes, counsel pleaded on his behalf that he was
now blind and of impaired intellect, and the motion against him was
defeated. He died in the following year, leaving[360] all his property to his
wife Rhoda.
Webb was a Fellow of the Society of Antiquaries and of the Royal
Society. He had acquired large collections of MSS., coins and medals,
marble busts and bronzes.
His widow married, in 1771, Edward Beavor, whose name is found in
the ratebooks in connection with the house from that date until 1774. On
16th November, in the latter year, the two houses were sold[361] to Trustees
for the Freemasons, who have ever since held the property.
It is now time to return and trace the history of the other of the two
portions into which Lane had divided the house, viz., that part which
fronted Great Queen Street.
The ratebook for 1709 gives “the Bishop of Salisbury” as the
name of the occupant at that time. This must refer to the famous
Gilbert Burnet, who held the see of Salisbury from 1689 until his
death in 1715. He was born in Edinburgh on 18th September, 1643,
and having, as a precocious boy, entered the Marischal College of
Aberdeen at the age of ten, he became master of arts by the time he
was fourteen. The next few years were devoted to the study of
Burnet. divinity and history and to travel. In 1665 he was appointed minister
of Saltoun, but resigned in 1669, when he became professor of
divinity at Glasgow University. He made several visits to London,
and in 1674, having incurred the jealousy of Lauderdale, he resigned his
professorship and settled in London. In 1675 he was made chaplain to the
Rolls Chapel, the lectureship to St. Clement’s being added shortly
afterwards. In 1676 he took a house in Lincoln’s Inn Fields, next door to Sir
Thomas Littleton, and stayed there apparently for six years.[362] Littleton at
some time between 1675 and 1683 occupied No. 52, Lincoln’s Inn Fields,
[363] and though, in the absence of more definite information, it cannot be
proved that this was the house he was occupying in 1676, it is extremely
probable that this was the case. If so, Burnet’s house was No. 51, as it is
known that Nos. 53–4, the house on the other side, was at the same time in
the occupation of the Countess of Bath. After the Rye House plot in 1683
and the execution of his friend William, Lord Russell, Burnet withdrew to
France, and on his return in 1684 was deprived of his positions. Upon the
accession of James he again withdrew to the Continent, finally accepting an
invitation from William and Mary to settle at the Hague, where he was
instrumental in reconciling them.[364] He accompanied William to England,
was responsible for the form in which William’s Declaration appeared in
English,[365] and was rewarded for his services with the Bishopric of
Salisbury. Notwithstanding a subsequent decrease in favour with William,
he was offered in 1698 the position of governor to the young Duke of
Gloucester, and accepted it on conditions which allowed him to attend to
the affairs of his diocese.[366] The most lasting achievement of his later years
was the provision for the augmentation of poor livings, generally known as
Queen Anne’s Bounty, which became law in 1704. He died on 17th March,
1714–15, and was buried in St. James’, Clerkenwell, having resided at St.
John’s Court in that parish for some years.[367] His chief characteristic was
tolerance, which he continually urged, whether towards Scotch
Presbyterians in his early days, to Roman Catholics at the time of the
“popish plot” in 1678, or to non-jurors and Presbyterians in his own diocese.
His chief literary works were:—History of the Reformation, published
between 1679 and 1714; Exposition of the Thirty-nine Articles, published in
1699; and a History of My Own Time, which was published posthumously
in 1723 and 1734.
The ratebooks for 1715 and 1720 show “Lady Anne Dashwood” at the
house. Apparently this was Anne, daughter of John Smith, of Tudworth,
Hants, widow of Sir Samuel Dashwood, Lord Mayor in 1702–3, who was
knighted in July, 1684, and died in 1705.[368] She died on 16th June, 1721.
[369]

In 1723 “Lord Bellomonte” was resident at the house. This was

Richard Coote, fourth Earl Bellamont. He was born in 1683, and succeeded
to the earldom in 1708. He was married twice, his second marriage (to Lady
Oxenden) taking place in 1721 at St. Giles-in-the-Fields. On his death in
1766 the earldom became extinct.[370] Lord Bellamont seems to have
removed to Nos. 55–56, Great Queen Street and to have left there in 1729 or
1730.[371]
From 1730 onwards, until the date of acquisition by the Freemasons,
the occupants of the house were as follows:—
 1730–33. Thos. Iley.
1737. Earl of Macclesfield.
1740–42. —— Vanblew.
1746. Geo. Hudson.
1747–64. Thos. Hudson.
1765–67. Thos. Worlidge.
1768–75. Jas. Ashley.

George Parker, second Earl of Macclesfield, was born in 1697. He

married in 1722 Mary Lane,[372] and succeeded to the earldom in 1732, at
which time he was resident in Soho Square.[373] He had a great taste for
mathematics, in which he had been instructed by Abraham de Moivre and
William Jones, and, aided by James Bradley, who afterwards, by his
influence, became astronomer-royal, erected about 1739 an astronomical
observatory at his residence at Shirburn Castle, Oxfordshire. From 1740
until near his death, he carried out a series of personal astronomical
observations. Macclesfield was the principal author of the measure which
brought about the change of style in 1752, and in consequence incurred
great unpopularity among the ignorant, who imagined that they had been
robbed of eleven days. In 1762 he was elected President of the Royal Society,
a position which he held until his death in 1764.
Thomas Hudson was born in Devonshire in 1701. He became a pupil
of Jonathan Richardson, the elder, portrait painter (with whose daughter he
made a runaway match), and on setting up for himself in the same
profession, soon attained to great eminence, though his prosperity faded
with the rise of one of his pupils, Joshua Reynolds.[374] His residence in
Great Queen Street began about 1746,[375] and continued until about 1764,
[376] when he retired to Twickenham[377] where he died in January, 1779.

He was succeeded in his occupation of the house in Great Queen

Street by Thomas Worlidge,[378] painter and etcher. Worlidge was born at
Peterborough in 1700. He came to London about 1740, and settled in the
neighbourhood of Covent Garden, where he remained for the rest of his life,
residing at various times in The Piazza, Bedford Street, King Street, and,
finally, Great Queen Street. He first made a name by his miniature portraits,
but eventually concentrated his energies on etching in the style of
Rembrandt. He died at Hammersmith in September, 1766. His name
appears in the ratebook also for 1767, and this is explained by the fact that
his widow “carried on the sale of his etchings at his house in Great Queen
Street.”[379] Shortly afterwards Mrs. Worlidge married a wine and spirit
merchant named Ashley,[379] who had been one of Worlidge’s intimate
friends, and in accordance with this is the fact that in the ratebook for the
following year (1768) “James Ashley” is shown at the house.
 In 1774, the premises were occupied for a short time by Mary
Robinson (née Darby), afterwards known as “Perdita,” who had just got
married. Perdita’s own account of the matter is as follows: “On our return to
London after ten days’ absence, a house was hired in Great Queen Street,
Lincoln’s Inn Fields. It was a large, old-fashioned mansion, and stood on
the spot where the Freemasons’ Tavern has since been erected. This house
was the property of a lady, an acquaintance of my mother; the widow of Mr.
Worlidge, an artist of considerable celebrity. It was handsomely furnished,
and contained many valuable pictures by various masters. I resided with my
mother; Mr. Robinson continued at the house of Mr. Vernon and Elderton
in Southampton Buildings.”[380]
Mary, who was born at Bristol in 1758, had spent an unhappy
childhood, and had now, when only sixteen, contracted a loveless marriage.
At her husband’s request the nuptials were kept secret, but after four
months her mother insisted on their being made public. After a visit to the
west of England and stay of “many days” at Bristol, she removed from Great
Queen Street to No. 13, Hatton Garden, a house which had been recently
built.[381] Her remarkable beauty caused her to receive many attentions, and
she was neglected by her husband. On his imprisonment for debt, however,
after less than two years’ married life, she shared his confinement, and was
for nearly ten months in the King’s Bench Prison. She then secured an
engagement at Drury Lane, where she made her first appearance in
December, 1776, as Juliet. Her stage career lasted until May, 1780. When
taking the part of “Perdita” in a performance of the Winter’s Tale in
December, 1778, she captivated the Prince of Wales (afterwards George IV.),
and after a correspondence in which the writers signed themselves
“Florizel” and “Perdita” she became his mistress for about two years. He
then deserted her, dishonouring his bond for £20,000, payable on his
coming of age. In 1783 she managed to obtain a pension of £500 a year. She
never returned to the stage, but devoted herself to literature. In her own day
she was called the English Sappho, but her reputation in this respect has not
endured. She died, crippled and impoverished, at Englefield Cottage,
Surrey, in 1800.

Conway House.

The first occupant of the fourth house on the site of the Freemasons’
buildings seems to have been Lord Conway. A deed, dated 20th December,
1641,[382] mentions Edward, Lord Viscount Conway, as then in occupation,
and no doubt the house is identical with that referred to as Lord Conway’s
residence in Queen Street in a letter dated 31st March, 1639.[383]
Edward, second Viscount Conway and Killultagh, was born in 1594,
and succeeded to the title in February, 1631.[384] Shortly afterwards he was
living in Drury Lane.[385]
His residence in Great Queen Street dates from 1638
or the commencement of 1639, but he did not purchase the
house until 17th July, 1645.[386]
Conway died at Lyons in 1655[387], and was succeeded
by his son Edward, the third Viscount and first Earl of
Conway, born about 1623. He held several important military Conway.
appointments, and was for two years, 1681–3, secretary of
state for the north department. He was the author of a work
entitled Opuscula Philosophica. He was married three times, his first wife
being Anne, the daughter of Sir Henry Finch. Lady Conway was a most
accomplished woman, her chief study being metaphysical science, which
she carried on with the utmost assiduity in spite of tormenting headaches
which never left her. In later life she adopted the tenets of the Society of
Friends. She died on 23rd February, 1679, while her husband was absent in
Ireland, but in order that he might be enabled to see her features again, Van
Helmont, her physician, preserved the body in spirits of wine and placed it
in a coffin with a glass over the face. The burial finally took place on 17th
April, 1679. She was the author of numerous works, but only one, a
philosophical treatise, was printed, and that in a Latin translation published
at Amsterdam in 1690. Conway was created an Earl in 1679 and died in
August, 1683, leaving his estates to his cousin, Popham Seymour, who
assumed the name of Conway.
Up to 1670 the Earl seems to have resided frequently in Great Queen
Street. The Hearth Tax Rolls for 1665 and 1666 show him as occupier,
though the former contains a note: “Note, Lord Wharton to pay,”[388] and
several references to his residence there occur in the correspondence of the
time. Thus on 18th March, 1664–5, he writes to Sir Edward Harley, “Direct
to me at my house in Queen Street”;[389] in June [?], 1665, he informs Sir
John Finch: “I am settled in my house in Queen Street”;[390] a letter to him
describes how on the occasion of the Great Fire in 1666, “your servant in
Queen Street put some of your best chairs and fine goods into your rich
coach and sent for my horses to draw them to Kensington, where they now
are”;[391] on 19th October, 1667, his mother writes to him at “Great Queen
Street, London”;[392] in February, 1667–8, he tells Sir J. Finch that he hopes
“you will ere long be merry in my house in Queen Street, which you are to
look upon as your own”;[393] and on 4th March, 1668–9, Robert Bransby
asks for payment of his bill of £200 “for goods delivered at your house in
Queen Street.”[394] On 25th September, 1669, we learn that a new (or
perhaps rather an additional) resident is expected, Edward Wayte
mentioning in a letter that “the room your lordship wished to have new
floored is going to be occupied by Lord Orrery’s[395] daughter, who is
coming with her mother to England.”[396] The visit evidently took place, for
on 4th November, 1669, Conway’s importunate creditor, Bransby, writes, in
connection with the non-payment of his account, “I beg the delivery of
divers goods in the house in Queen Street, which are being used by some of
Lord Orrery’s family, and also of some green serge chairs lent, which are in
your study”;[397] and again on 15th March, 1669–70: “there are some goods
belonging to me in the house in Queen Street, which are in Lord Orrery’s
wearing.”[398] Later in the same year the house seems to have been given
up, as Bransby on 27th September in the course of another pitiful complaint
says: “I hear that you have disposed of your house in Queen Street and sent
the furniture to Ragley.”
The Hearth Tax Roll for 1673 shows the house in occupation of
“Slingsby, Esq.,” who was probably the immediate successor of Conway.
In the absence of more definite information Slingsby cannot be
identified. It is just possible that he was Henry Slingsby, the Master of the
Mint, and friend of Evelyn.
In the Hearth Tax Roll for 1675 the house is shown as empty, and in
the ratebook for 1683 the name of the occupier is given as: “Sir Fr. North,
Knt., Lord Keeper of the Great Seal of England.” It is known (see below)
that the offices of the Great Seal were situated in this street in 1677, and
there can be no doubt that this was the house.
It would appear, therefore, that the premises were taken for the
purpose of the offices of the Great Seal some time in the period 1675–77,
and consequently during the time that the seal was in the custody of Finch.
Heneage Finch, first Earl of Nottingham, was born in 1621, the eldest
son of Sir Heneage Finch, recorder of London and speaker in Charles I.’s
first parliament. On leaving Christ Church he joined the Inner Temple,
where he acquired a great reputation and an extensive practice. On the
Restoration he became solicitor-general and was created a baronet. As the
official representative of the court in the House of Commons, he seems to
have given every satisfaction to the king, despite the fact that on at least one
important point (the toleration of dissent) he opposed the royal desire. He
was indeed in such favour that the king, with all the great officers of state,
attended a banquet in his house at the Inner Temple in 1661. In 1670, he
became attorney-general and counsellor to the queen. On the dismissal of
Shaftesbury in 1673, he was made Lord Keeper of the Great Seal, and was
raised to the peerage as Baron Finch of Daventry, and a year afterwards was
appointed Lord Chancellor. During his term of office the well-known
burglary took place at the house in Great Queen Street. Under date of 7th
February, 1676–7, Anthony Wood writes: “About one or two in the morning
the Lord Chancellor his mace was stolen out of his house in Queen Street.
The seal lay under his pillow, so the thief missed it. The famous thief that
did it was Thomas Sadler, soon after taken and hanged for it at Tyburn.”[399]
As Lord Chancellor, Finch had the unpleasant task of explaining to
the House of Commons how the royal pardon given to Danby in bar of the
impeachment bore the great seal. He was created Earl of Nottingham in
 1681 and died in December, 1682. “The fact that throughout an
unceasing official career of more than twenty years, in a time of
passion and intrigue, Finch was never once the subject of
parliamentary attack, nor ever lost the royal confidence, is a
remarkable testimony both to his probity and discretion.”[400] He
was the Amri of Dryden’s Absalom and Achitophel.
Finch. Francis North, first Baron Guilford, was the
third son of Dudley, fourth Baron North, and was
born in 1637. He entered the Middle Temple in 1655,
and at once gave himself up to hard study. He was called to
the Bar in 1661, and seems very early to have acquired
practice. His first great case occurred in 1668, when he was
called upon, in the attorney-general’s absence, to argue in the
House of Lords for the King v. Holles and others. He at once North.
sprang into favour and became king’s counsel. In 1671 he was
made solicitor-general and received the honour of
knighthood. In 1673, he succeeded Finch as attorney-general, and in 1675
was appointed chief justice of the common pleas. On the death of the Earl of
Nottingham in 1682 he succeeded him as Lord Keeper, and from that day,
his brother Roger says, “he never (as poor folks say), joyed after it, and he
hath often vowed to me that he had not known a peaceful minute since he
touched that cursed seal.”[401] In 1683 he was raised to the peerage as Baron
Guilford. From this time his health began more and more to fail, and
though he continued diligently to perform his duties, he was compelled in
the summer of 1685 to retire to his seat at Wroxton, Oxfordshire, taking the
seal with him and attended by the officers of the court. Here he died on 5th
September, 1685, and the next day his brothers, accompanied by the
officials, took the seal to Windsor, and delivered it up to the king, who at
once entrusted it to Jeffreys.
George Jeffreys, first Baron Jeffreys of Wem, was born in 1648 at
Acton in Denbighshire. He was ambitious to be a great lawyer, and after
overcoming with difficulty his father’s objections, he was admitted to the
Inner Temple in 1663. He was called to the Bar in 1668, and by his wit and
convivial habits making friends of the attorneys practising at the Old Bailey
and Hicks’s Hall, he soon gained a good practice. He was appointed
common serjeant of the City of London in 1671. He now began to plead in
Westminster Hall, and by somewhat doubtful means he obtained an
introduction to the court. In 1677 he was made solicitor-general to the Duke
of York, and was knighted, and in 1678 became Recorder of the City. Both as
counsel and recorder he took a prominent part in the prosecutions arising
from the Popish Plot, and as a reward for his services in this direction, and
for initiating the movement of the “abhorrers” against the “petitioners,” who
were voicing the popular demand for the summoning of parliament, he was
appointed chief justice of Chester.
 The City having complained to the House of Commons of the action
of its recorder in obstructing the citizens in their attempts to have a
parliament summoned, the House passed a resolution requesting the king
to remove him from all public offices. The king took no such action, but
Jeffreys submitted to a reprimand on his knees at the bar of the House, and
resigned the recordership, eliciting the remark from Charles that he was
“not parliament proof.”
In 1683, Jeffreys was promoted to be Lord Chief Justice, and was
soon a member of the privy council. Shortly afterwards he tried Algernon
Sidney for high treason, conducting the proceedings with manifest
unfairness and convicting the prisoner on quite illegal grounds. On the
accession of James II. in 1685, he was raised to the peerage, an honour
never before conferred upon a chief justice during his tenure of office.
In July, after the battle of Sedgmoor, he was appointed president of
the commission for the western circuit, and on 25th August he opened the
commission at Winchester. This, the “bloody assizes,” was conducted with
merciless severity, but the king was so satisfied that, on Jeffreys calling at
Windsor on his return to London, he was given the custody of the great seal
with the title of Lord Chancellor. During the next three years he vigorously
supported the king in his claims to prerogative. He presided over the
ecclesiastical commission, and over the proceedings against the
Universities. Jeffreys thus became identified with the most tyrannical
measures of James II., and therefore, when the king in December, 1688,
fled from the country, he also endeavoured to escape. He disguised himself
as a common sailor, but was recognised, and was only saved from lynching
by a company of the train-bands. He was confined at his own request in the
Tower, and here, his health having been seriously undermined by long
continued disease and dissipation, he died in April, 1689. His name has
become a by-word of infamy, although there can be little doubt that he was
not entirely as black as he has been painted, and no impartial account can
fail to insist on the traditional picture of him being modified in many
respects. Nevertheless, when every allowance is made, the character of
Jeffreys is one of the most hateful in English history.
On his accepting the Great Seal he also took over the house in Great
Queen Street,[402] but about 1687 he removed to the new mansion, which he
had had built in Westminster overlooking the park.[403]
For the next few years the history of Conway House is a blank. In
1696 a private Act[404] was obtained, which, after reciting that there was a
mansion house, with stables and outhouses, in Queen Street, St. Giles,
forming portion of the estate belonging to the Marchioness of
Normanby[405] (life tenant) and of the estate belonging to Popham Seymour
alias Conway, and that the house was liable to fall down from want of
repair, gave authority to arrange with a builder to effect the repairs and to
let the house for 51 years at a proper rent.
 The work was evidently carried out without delay, for the Jury
Presentment Roll for 1698 has the entry “Dr. Chamberlain for the Land
Credit Office,” but little luck seems to have attended the house during most
of its remaining half-century of existence.
The sewer ratebooks for 1700 and 1703 make no mention of the
house. Those for 1715, 1720 and 1723, and the parish ratebooks from their
commencement in 1730 until 1734 mention it as “The Land Bank.” The first
entry refers to it as “Empty many years,” and it was still empty in 1720.
Certain deeds of later date[406] allude to the premises as a “large old house
or building commonly called or known by the name of the Land Bank.”[407]
The Land Bank, as known to history, was an institution founded in
1696, for the purpose of raising a public loan of two millions on the basis of
the estimated value of real property. Its promoter was Dr. Chamberlain, an
accoucheur.[408] It is unnecessary to give here a full account of the scheme,
but it may be regarded as certain that it would never have been supported in
Parliament but for the satisfaction felt by many influential members in
dealing a blow at the recently formed Bank of England.
The evidence given above is decisive as to some connection between
the house and this scheme, but no reference to the former has been found
amongst the literature on the Land Bank.[409] The fact that Dr. Chamberlain
was in occupation of the premises in 1698, two years after the ignominious
collapse of the scheme, shows that the Land Bank still pursued some kind of
existence, and, indeed, there is other evidence that it was surviving in some
form in January, 1698.[410]
The above evidence shows that for many years after Dr.
Chamberlain’s tenancy the house lay empty, and not until 1735 is the name
of an occupier given. This was Thomas Galloway, who stayed until 1739.
After this, the house again remained empty, until in 1743 it was pulled
down, and its frontage to Great Queen Street was occupied by four smaller
houses. The residents in the two westernmost of these (the other two
occupied the site of Markmasons’ Hall) were as follows:—

Eastern house. Western house.

1746–47. Chas. Green. 1746–49. Jas. Lacey.
1748–51. —— Dickenson. 1750–61. Mrs. Eliz. Morris.
1751. Jas. Ord. 1761–63. J. Fanshawe.
1753–57. Mrs. Barbra Johnson. 1763–83. Eliz. Pollard.
1758. W. Westbrook Richardson. 1783–91. John Opie.
1759–75. John Johnson. 1791. — Leverton.
1776–83. J. Twiney. 1792– Mallard and Richold.
1783– Thos. Pope.
 John Opie, portrait and historic painter, was born in Cornwall in
1761. Instead of following his father’s trade as a carpenter, he took up
painting and attracted the notice of Dr. Wolcot (Peter Pindar), who brought
him after a while to Exeter, and in 1780 to London. Here Opie became
known as the “Cornish wonder,” and, indeed, the fact that he, a carpenter’s
son in a remote Cornish village, without any regular instruction or
opportunity of studying the work of great painters, should at the age of
nineteen have produced pictures which the most distinguished artists in the
country admired and envied, justified the name. Wolcot’s introductions
were the means of Opie securing many valuable commissions, and his
popularity became enormous. During the spring of 1782, his lodgings in
Orange Court, Castle Street, Leicester Square, were thronged with rank and
fashion, and after he had moved to Great Queen Street in the following year,
the street was at times blocked with the carriages of his sitters. His
popularity, however, waned as suddenly as it had risen. This he had
expected, and had striven, and continued to strive, to perfect himself in his
art, and to supply the deficiencies in his education. In 1791, he moved from
Great Queen Street to No. 8, Berners Street. In 1805 he was elected
professor of painting to the Royal Academy, and the lectures which were
delivered only a few weeks before his death form a contribution of
permanent value to the literature of art criticism. He died in April, 1807,
and was buried in St. Paul’s.
The Council’s collection contains:—
[411]Plan of premises before 1779 (photograph).
[411]Elevation of premises in 1779 (photograph).
[411]Exterior of the tavern in 1811 as designed by William Tyler in
1785 (photograph).
[411]The façade, designed by F. P. Cockerell (1866) (photograph).
[411]Elevation of the north end of the Temple, as designed by Thomas
Sandby in 1775 (photograph).
[411]The disastrous fire at Freemasons’ Hall. The scene of the
conflagration of 1883, from a woodcut (photograph).
[411]The Temple, looking south (photograph).

The Temple, looking north (photograph).

The chair of the Grand Master (photograph).
[411]View of the New Masonic Hall, looking south, pen sketch design
by Sir J. Soane, (1828) (photograph).
Plan of the ground floor before the alterations of 1899 (measured
drawing).
[411]Plan of the principal floor before the alterations of 1899
(drawing).
[411]Grand staircase (photograph).

First floor corridor (photograph).

[411]Vestibule to Temple, showing mosaic paving (photograph).

Interior of Banqueting Hall—Connaught Rooms looking north

(photograph).
Three swords in museum (photograph).
XXXIX.—MARKMASONS’ HALL.
Ground landlords.
The United Grand Lodge of Antient Free and Accepted
Masons of England.
General description and date of
structure.
The origin of these premises, comprising the two easternmost
of the four houses built in 1743 on the site of Conway House, has
already been described.[412] In 1889 the houses, which had for many
years been used for the purposes of Bacon’s Hotel, were occupied by
the Grand Lodge of Mark Master Masons. The exterior and most of
the interior has been rebuilt or modernised, with the exception of the
two rooms on the first floor facing Great Queen Street, which appear
to date from the rebuilding in 1743. The Board Room, to the east, has
a fine carved deal mantelpiece and overmantel (Plate 29). The
mantelpiece has a carved head, representing Bacchus in the frieze
and scrolls at the sides. The overmantel takes the form of a picture
with a carved frame and bold broken pediment over; the tympanum
is filled with a finely carved basket containing flowers and fruit. The
other feature of the room is a decorative ceiling (Plate 30), having a
large central medallion representing children.
The Grand Secretary’s room has also a decorative plaster
ceiling (Plate 31), with four oval medallions containing trees and
flowers. The chimneypiece is a modern replica in wood and plaster of
the one already mentioned.
Condition of repair.
The premises are in excellent repair.
Biographical notes.
The residents in the two easternmost of the four houses built on the
site of Conway House in 1743 were as follows:—

Eastern house. Western house.

1745–47. John Williams. 1745–51. John Moreton.
1748–51. Lily Aynscombe. 1753–58. Is. Hawkins Browne.
1753–56. Henry Shiffner. 1759–68. Mrs. Mary Clarke.
1758–87. Joseph Pickering. 1768–72. Ch. Raymond.
1787–91. —— Leverton. 1772–93. Joseph Hill.
1791–94. Wm. Hutchins. 1793–99. J. Bower.
1795. —— Savage. 1799– —— Baines.
1795– —— Dickenson.

Henry Shiffner, on leaving the house in Great Queen Street, removed

to No. 59, Lincoln’s Inn Fields, where he has left permanent traces of his
occupation.[413]
The “Leverton” whose name appears in connection with the first and
fourth (see p. 83) of the houses erected on the site of Conway House for the
years 1787–91 and 1791 respectively, was almost certainly Thomas Leverton,
the architect. The Royal Academy Catalogues give the addresses of T.
Leverton as follows: 1773–78, 1780–83 (Great Queen Street), 1784–5, 1787
(Charlotte Street, Bedford Square), 1794 (Great Queen Street), 1797
(Bedford Square). The Catalogue for 1792 shows “Leverton” (without initial)
at 60, Great Queen Street. Unfortunately, his name does not appear in the
Catalogues for the period 1787–91, and thus direct confirmation of his
identity with the occupier of the houses in question is not possible. It may
be added that there is no mention in the ratebook of any “Leverton” at No.
60 in 1792, and Leverton’s residences in Great Queen Street in the other
years mentioned[414] would seem to have been in lodgings, as no trace of
them can be discovered.
Isaac Hawkins Browne, poet, was born in 1705 at Burton-on-Trent,
his father being vicar of the parish. Although called to the Bar he did not
take up his profession in earnest. He was twice M.P. for the borough of
Wenlock. His chief English works were a poem on Design and Beauty, and
an ode entitled A Pipe of Tobacco, but his principal achievement was a Latin
poem De Animi Immortalitate. He died in 1760. Mrs. Piozzi relates that Dr.
Johnson said that Browne was “of all conversers ... the most delightful with
whom I ever was in company; his talk was at once so elegant, so apparently
artless, so pure, and so pleasing, it seemed a perpetual stream of sentiment,
enlivened by gaiety, and sparkling with images.”[415] Johnson also used
Browne as an illustration of the proposition that a man’s powers were not to
be judged by his capacity for public speech: “Isaac Hawkins Browne, one of
the first wits of this country, got into Parliament and never opened his
mouth.”[416]
Browne’s son, also named Isaac Hawkins, must also have been a
resident at the house in Great Queen Street, for he was only eight years old
at the time of the removal of the family thither in 1753. He represented
Bridgnorth in Parliament for twenty-eight years, and though no orator,
when he spoke “his established reputation for superior knowledge and
judgment secured to him that attention which might have been wanting to
him on other accounts.”[417] He edited his father’s poems, and also wrote
Essays, Religious and Moral, and Essays on Subjects of Important Inquiry
in Metaphysics, Morals and Religion. He died in 1818.