* Regulators show leeway on booking trades
* Grace period delays need for big staff moves
* Brexit uncertainty clouds distant future
By Anjuli Davies and John O'Donnell
LONDON/FRANKFURT, Oct 31 (Reuters) - European regulators are considering making it easier, at least temporarily, for banks to handle some EU-related business in Britain immediately after Brexit, industry sources told Reuters.
They say it may be possible come March 2019 when Britain leaves the European Union to book trades done in centres such as Frankfurt out of London for some time.
This has eased pressure on banks to rush staff out of London and is one reason that some banks have reduced estimates for the number of jobs they expect to move.
Britain's EU departure is expected to force banks to move thousands of jobs into the bloc so that they can continue processing EU-related trades.
However, some banks have recently scaled back estimates of how many jobs will have to shift, with UBS saying on Friday it is likely to move fewer jobs than the 1000 it had previously projected.
JPMorgan boss Jamie Dimon said before the Brexit vote that up to 4,000 of its 16,000 jobs in Britain might be at risk, but has since said it is not planning to move many jobs out of Britain in the next two years.
A spokesman for UBS declined to comment about whether the lower estimates were connected with a regulatory reprieve. A JPMorgan spokeswoman was not immediately available for comment.
The length of any grace period, designed to avoid any market shock when Britain leaves the bloc, will likely be determined by the future trading terms with the EU.
Bankers say German bank regulator Bafin, the agency overseeing Frankfurt, where many banks are moving staff, has said there is leeway.
"Bafin has told several banks that there would be a tolerance period," said Oliver Wagner of Germany's Association of Foreign Banks, adding that he expected it to last one year.
A spokesman for Bafin was not immediately available for comment but President Felix Hufeld said on Oct 24 that "banks must be in a position to sensibly manage the associated risks comprehensively – in particular if a back-to-back model should suddenly no longer be possible or would have to be revised."
At the centre of discussions among regulators are 'back-to-back' arrangements - where a deal done on the continent could be processed and risk-managed at the bank's base in London. The practice is already commonly used, with banks often booking trades executed on Asian markets in London or New York.
Bankers, who asked not to be named, said they were encouraged by signals that could allow them, for the near term, to keep the bulk of operations in the British capital rather than dividing them across the region.
"Regulators are trying to be helpful and pragmatic," said one bank executive.
Financial watchdogs, including the European Central Bank, have warned banks from the outset that they will need more than just a 'letterbox' in Europe, demanding a critical mass of capital and senior local staff.
A spokesman for the European Central Bank, which supervises banks, said its "priority is that banks should not operate as empty shells" within the euro zone.
But on its website, it also signals willingness to be temporarily flexible with back-to-back trades as long as risks are managed.
The European Banking Authority has also said banks could continue booking trades from Europe in London, so long as they did not rely on 'empty shells' in European countries and took safeguards.
"We've come quite a long way from a year ago and now it’s sort of a quid pro quo," said Wagner.
The gentler stance is welcome news for some investment banks, who have complained about the length of time it is taking to get clarity on how they should structure their operations after Brexit.
Writing on Twitter on Monday, Goldman Sachs chief executive Lloyd Blankfein expressed confidence in London. "Still investing in our big new Euro headquarters here. Expecting/hoping to fill it up," he said.
Bank executives who spoke to Reuters said they hoped that the status quo would remain, a view echoed by experts.
"It is in the interests of European regulators to be flexible," said Karel Lannoo of the Centre for European Policy Studies, a Brussels-based think tank. "Otherwise they will be just hurting themselves."
But it is not clear how long this kind of work-around will be in place, with expectations that in the longer term regulators will be tougher.
The Bank of England expects that when Britain leaves the bloc around 10,000 jobs in the financial sector will be lost in Britain but that could climb to as much as 75,000 in the three to five years afterwards.
"On day one, back to back trading will be acceptable," said Vishal Vedi, a partner at Deloitte who is advising financial companies preparing for Brexit.
"What regulators are concerned about is the long-term use of back to back. That's top of the agenda ... but they haven't reached a conclusion." (Writing By John O'Donnell; additional reporting by Rachel Armstrong and Huw Jones in London and Tom Sims in Frankfurt; editing by Anna Willard)