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Financial markets in Britain and the European Union will face instability and significant business disruption if the U.K. exits the EU in March 2019 without a transition deal or final settlement on a number of crucial issues, a finance industry trade group warned.

There are at least five key areas where financial firms need clarity from U.K. and EU policymakers to avoid instability, the Association for Financial Markets in Europe said in a report published Monday. These include an agreement on data transfers, continuity of contracts, legal jurisdiction, access to market infrastructure and recognition of bank resolution actions, according to AFME.

A quarter of all over-the-counter derivative contracts entered into by parties in both the U.K. and EU with a gross notional value of 26 trillion pounds ($36 trillion) could be affected if U.K. financial firms lose their right to be recognized as properly regulated entities following Brexit, the group said. Of these, derivatives worth 12 trillion pounds are due to mature in the first quarter of 2019 alone.

No Cherry Picking

"Impairment to the servicing of these contracts could disrupt market functioning and make it more expensive for firms and households to insure against risks," AFME said in the report. It called on existing cross-border contracts to be grandfathered and existing service arrangements to continue until maturity.

Simon Lewis, AFME’s chief executive officer, said in a statement that "urgent action" from policymakers and regulators is needed to mitigate these "cliff edge" risks -- disruption that would occur if the U.K. leaves the EU without a transition deal or final settlement.

Michel Barnier, the EU chief Brexit negotiator, has ruled out maintaining easy access to the continent’s financial markets for British firms as part of a trade deal, saying that this would be tantamount to allowing the U.K. to "cherry pick" some aspects of EU membership.

But the leaders of individual EU member states have taken a less hardline position, meaning some agreement that would provide special access for U.K. financial firms may still be possible.

‘Significant Uncertainty’

“There are now less than 15 months before the U.K. leaves the EU and the financial services industry continues to face significant uncertainty," Lewis said. "It is therefore imperative that agreement is reached as soon as possible on transitional arrangements."

Many firms currently rely on data centers located in the U.K. to provide financial services across all of the EU’s 28 member states. The U.K. has moved to align its own data protection laws with those of EU, but after Brexit it will need to have its data protection framework officially recognized as "adequate" in order for personal data transfers to continue.

In addition, U.K. financial firms currently operate across the EU under passporting rights. It remains unclear if the EU will allow these to continue as part of a final exit agreement or as part of a separate post-Brexit trade deal between the U.K. and EU. Without such rights, firms in both Britain and the EU might be unable to service contracts involving entities in the other geography.

AFME warned that the status of the jurisdiction for contract disputes and enforcement and recognition of judgments also needs to be clarified, since the current EU regulation concerning such issues would cease to apply. The U.K. and EU also need to make sure there is no disruption to how central counter-party clearing houses, which clear and settle financial trades, function, the group said.

Finally, the U.K. and EU need to make sure that bank resolution actions in the EU and U.K. continue to be recognized without banks having to re-issue contracts.

The trade group said that while a longer transition period could reduce some of the risk of instability, agreement between the EU and U.K. would ultimately be needed on all of these issues before the transition period ended.