May 13, 2016 / 3:55 PM / 4 years ago

UPDATE 1-Bank of England should ready FX swap lines for Brexit tension -IMF

(Adds industry source on BoE preparations)

By David Milliken and Patrick Graham

LONDON, May 13 (Reuters) - The Bank of England may need to call on other central banks for foreign currency if Britain’s referendum on European Union membership hits the world’s biggest currency trading centre, the International Monetary Fund said on Friday.

The IMF’s call for the BoE to be ready to activate swap facilities suggested preparations for intervening, if necessary, to prevent excessive volatility in sterling after the vote on June 23, senior banking industry figures told Reuters.

They said banks in London were discussing with the BoE how to deal with the consequences of the referendum. Some analysts have warned the vote could lead to gyrations by the pound similar to moves by the Swiss franc in January 2015.

The IMF, which published an annual report on Britain’s economy on Friday, welcomed a promise by the BoE to provide more sterling funds if needed, and warned that the referendum could lead to currency market tension.

“The Bank of England has appropriately announced plans to hold additional liquidity auctions in the weeks around the referendum,” the IMF said. “There may also be a need to activate swap facilities with other major central banks in the event of a shortfall of foreign exchange liquidity.”

The BoE said on Thursday that possible “heightened uncertainty” due to June’s vote may make it harder for banks to tap their usual sources of foreign currency, and that it would keep its operations, including swap lines, under review.

The BoE holds weekly auctions of U.S. dollars and has agreements with the central banks of the United States, the euro zone, China, Japan, Canada and Switzerland to provide each other foreign currency in case of market tensions.

The foreign currency can then be lent temporarily to private financial institutions in exchange for collateral, to reduce volatile swings in sterling caused by shortages of the currency.

That differs from intervention to support sterling against other currencies over the medium term. That last occurred sterling was part of the EU’s Exchange Rate Mechanism in the early 1990s. Authorisation from Britain’s finance ministry would be required for that.

“Clearly, they need to get their market intelligence and supervision prepared for any extreme volatility,” said one senior currency industry figure with close ties to the BoE.

Results of the referendum are likely to come in stages during the early hours of June 24, with the final result not necessarily being clear until later in the morning.

“Do (the BoE) therefore provide pricing overnight for a Brexit event in the middle of the night? I think they would be very reluctant,” the source said.

“The reason why they have opened those swap lines is in order to intervene, in order to supply the sterling that’s being bought by those central banks across the world,” he added.

Major currency trading banks, learning from the turmoil caused when the Swiss central bank removed its cap on the franc’s value in January 2015, would also send letters to clients warning of sharp moves in the currency, he said.

None of the top three trading banks by volume - Citi, Deutsche Bank and Barclays - had any immediate comment.

Finance ministers and central bank governors from the Group of Seven, the leading advanced economies, are due to meet in Japan next week.

IMF managing director Christine Lagarde said on Friday that global economic risks from a possible British vote to leave the EU had been high on the list of concerns among finance ministers she had met in recent months

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