The Financial Stability Board (FSB) has called for transparency and a holistic approach to the international financial system amid the Russia-Ukraine conflict.

In a speech at the ISDA annual general meeting, Klass Knot, chair of the FSB warned that while the global financial system has “absorbed the initial shock of the invasion without major adverse impacts”, financial stability “cannot be taken for granted”.

The FSB chair said that there is no room for complacency, suggesting that in the past few weeks there have surfaced new vulnerabilities related to commodity markets and undetected leverage.

He told attendees at the AGM that in March “very volatile commodity prices may give rise to financial strains” – through large margin calls, leveraged positions, and concentrated exposures, which could lead to spill-over effects onto the broader financial system.

“We have seen that certain banks, particularly prime brokers, seem to be prepared to take large positions without having sufficient visibility into the total leverage of their counterparties,” he said. “This raises questions about transparency and the risk management capabilities of lenders.”

He also highlighted cyber risk as a challenge for the global industry, saying “despite the apparent absence of a successful attack with systemic implications so far, we must not forget that cyber-attacks remain a major vulnerability.”

Knot called for transparency in the international financial system.

“Sound data on risks provides the essential foundation to manage those risks,” he added. “Concerns about the opacity of commodity markets, hidden leverage and the incomplete picture we have of crypto-asset markets underline the need to strengthen this foundation.”

He also urged the industry to look at the financial system in a holistic manner.

“Many of the issues in commodity and crypto-asset markets are about the interconnection of these markets with the rest of the financial system,” explained Knot. “The importance of interconnectedness similarly came to the fore during the market turmoil in March 2020.”

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