The U.K.'s exit from the European Union carries a number of "cliff-edge" risks that require careful consideration and assessment, warned the Association for Financial Markets in Europe.
The association, which represents Europe's wholesale financial markets, including banks and other capital market players, said in a discussion paper that its members are "concerned about the potential risks that Brexit can create for market efficiency and financial stability, in particular focusing on potential cliff-edge scenarios." It defines a cliff-edge risk as an issue that is expected to create market disruption or material impediments to business activities on the day Brexit takes effect — set for March 29, 2019 — if no legislative or regulatory intervention takes place.
AFME said time pressure on firms to prepare is increasing despite the fact that actual exit and future relationship arrangements are still unclear.
AFME also welcomed discussions over transitional arrangements, keeping existing market arrangements in place for a limited time following Brexit. "This is necessary to provide certainty and stability to business and market participants as they prepare for the future arrangements that have yet to be agreed between the EU and the U.K.," the paper said.
AFME also outlined issues it believes require intervention from policymakers or regulators, which cannot easily be resolved by the industry alone.
Among the risks outlined in the paper are those that relate to over-the-counter derivatives contracts because "impairment to the servicing of these contracts could disrupt market functioning and make it more expensive for firms … to insure against risks."