To most people, Citadel is known as one of the oldest and most successful hedge funds still in existence. But in 2002, founder Ken Griffin, launched Citadel Securities, which is a separate business and a leading market maker, providing liquidity and trade execution to retail and institutional clients in the US and globally.

In 2015, Citadel Securities entered Europe as a market maker in US Dollar swaps. Now the market maker is aiming to become the leader in the Scandinavian countries Sweden, Denmark and Norway.

"Our goal would be to be the number one provider to the local bank community of dollar liquidity from both cash and derivatives," says Brian Oliver, European Head of Fixed Income Institutional Sales in Europe to FWAM.

"We want to focus on the areas where we can be exceptionally good and where we can add value to the market through more efficient trading and better risk management – that includes liquidity provision in spot FX, Euro and US Dollar interest rates and US Treasuries," he explains.

Scandinavia most accessible

Only in 2014, Citadel Securities expanded its market making into interest rate swaps, and quickly became the leading market maker in the US.

The move into swaps followed new mandatory clearing requirements under the Dodd-Frank Act in the US, and with similar regulation from Mifid II in Europe due to enter into force in January 2018, Citadel Securities plan to replicate this success.

"For many years the swap market was governed by quite complex bilateral documentation between counterparties. Central clearing reduces complexity and risk and allows us to provide liquidity to clients," says Oliver.

A year into Citadel Securities' entry into the European markets, Scandinavia has been the most accessible market.

"Our experience in the region has been positive as the regional banks are focused on finding new sources of liquidity," Oliver explains.

Inquiries from pension funds

For now, Citadel Securities has its eyes set on the top 10 Scandinavian banks, because banks are the first category of market participant to be required to clear their derivatives trades.

"We've started to do trading of swaps with many of the local regional banks. This is not something we could have done three to five years ago. And that's the big change," says Oliver.

"When category two and three come into effect in 2018, that will include more asset managers, hedge funds and pension funds, but for now our focus is on category one. Many of them are here in Copenhagen," Oliver says while sipping his coffee at the Hotel D'Angleterre, pointing in the direction of bank headquarters situated near the Copenhagen Harbor.

According to Oliver, Citadel Securities has already had some inbound inquiries from the pension funds, but so far most of them do not use central clearing.

"Some pension funds are big users of swaps. But right now we prefer to partner with the banks, and then they can serve their local clients," Oliver says.

"While there is also a big demand to trade Danish Krone and Swedish Krona swaps with the large Scandinavian banks, our focus is on providing liquidity in Dollar swaps," he adds.

Constraints in banks' liquidity

The reason why the market is opening up to new players like Citadel Securities is due to constraints in banks' liquidity in the wake of the financial crisis.

"Generally speaking, fixed income products have been subject to much higher standards of capital and regulatory requirements since the crisis, making it more expensive for banks to facilitate trading swaps, and that has resulted in banks having to be more selective about where they allocate their resources," Oliver says.

"You probably see some local banks being more selective about providing resources in Scandinavian currencies or bonds," he adds.

In its December 2016 Financial Stability report, the Danish Central Bank has warned, that collateral rules may hurt Danish pension providers in times of financial stress.

"Pension companies may be affected by financial market shocks to such an extent that they may feel compelled to amplify market movements, thereby potentially contributing to self-reinforcing dynamics, for reasons other than incomplete hedging. Such reasons include liquidity risks," the Central Bank wrote, continuing:

"Although pension companies are not exposed to refinancing risks, companies using interest rate derivatives to hedge their interest rate risk still need a sufficient liquidity reserve in case of rising interest rates. The reason is that companies typically need to provide top-up collateral to their counterparties, either through cash deposits or other secure assets such as highly rated bonds. To the extent that collateralisation can be effected through other secure assets, it will suffice for the company to have a liquidity reserve consisting of these assets, which many companies have, given their large holdings of highly-rated bonds. However, new rules on central clearing for eurodenominated interest rate swaps, coupled with central counterparties’ strong preference for cash deposits as collateral, mean that in the long term pension companies may become cash-strapped during periods of rising interest rates and financial market turmoil. This situation may induce pension companies to sell assets, which could amplify market movements and cause further unrest."

So far, Citadel is the only of its kind active in the Scandinavian market. 

"Our goal is to be the first mover. We did that in the US, and we will do the same thing here. We are a very unique firm in that we have the scale and capacity to build these kind of businesses," Oliver says.