The UDA said in June it had started to decommission its weapons
People in County Londonderry and north Antrim are at risk following splits within the UDA and Ulster Political Research Group, it has been warned.
SDLP MLA John Dallat said the time for "pussyfooting with the UDA" was over.
"The announcement that the UPRG no longer recognises the authority of the PSNI cannot be ignored," he said.
One hundred and fifty loyalists gathered in Derry last Thurdsay. The UPRG said it was a protest at unionist leadership, not a show of strength.
The group walked around mainly loyalist housing estates in the Waterside for two hours before dispersing.
Sinn Fein Foyle MLA Martina Anderson described it as a sinister development.
"It was dignified, it was silent, it didn't intimidate anybody," said David Malcolm, regional secretary of the Ulster Political Research Group.
The police said they monitored the group throughout and no offences were committed and no complaints were made by the public.
Mr Dallat has written to the the Secretary of State and the Irish Department of Foreign Affairs.
"I do not want to see another generation of innocent people sacrificed and I do take some comfort from the fact that the PSNI have made successes in recent times and feel certain that this has provoked a great deal of resentment within the UDA at local level.
"The time for horse-trading with paramilitaries is over and the time for genuine partnership at every level of society leading to permanent reconciliation between our people is the only show in town," he said.
The UPRG said in July they are withdrawing support for the police in Londonderry and north Antrim.
The group, which has links with the UDA, has also withdrawn support for the political institutions after consulting with grass roots loyalists in the area.
Mr Malcolm said loyalist communities had not reaped any of the benefits of the peace process.
"They have been cut adrift," he said.
"Communities in the north west have sat back and watched all the benefits of the peace process go to communities around Belfast and the east of the province."