UPDATE 1-IG says Brexit vote poses challenge to European business

(Corrects first sentence to read "challenge" instead of "significant challenge")

* May consider subsidiary in EU city if UK loses passporting right

* Co asked clients to hold more cash to trade ahead of EU vote

* Came out of EU vote trading with no debt

* FY pretax profit rises

By Esha Vaish and Noor Zainab Hussain

July 19 (Reuters) - IG Group Holdings Plc said Britain's vote to leave the European Union presented a challenge to its online trading business, although it was devising plans to protect itself if UK firms lost the right to offer services across the EU.

IG (LSE: IGG.L - news) could look to convert one of its existing, large European branches into a subsidiary and trade across the rest of the Europe from there if the UK completely lost its "passporting" right to trade freely across the 28-nation bloc, its chief executive told Reuters, speaking after IG posted a rise in full-year profits.

"The worst scenario is that there is no passporting whatsoever from the UK into the EU. If that were to happen, we don't think it would be overly onerous to convert one of our big European branches into a subsidiary (to) passport across the rest of Europe," said CEO Peter Hetherington.

Financial services firms operating out of London rely on the EU's passporting system to sell their services across the bloc while being registered and regulated just in Britain. The system saves market participants huge amounts of money by not having to set up shop in each member state they wish to do business in.

IG, which provides online stock broking and trading services to retail investors, employs 1,400 people globally, including in EU cities such as Stockholm and Amsterdam, but the majority are based in London.

The company said it expects staff costs to rise as it seeks to retain top talent in London.

It (Other OTC: ITGL - news) has also launched a flexible benefits scheme, but said that the proportion of staff in London would continue to fall as it transferred more roles to Bangalore, India and Krakow, Poland.

Ahead of the EU vote, IG increased the amount of cash clients were required to hold in their accounts before making trades, a decision that helped the firm manage the "night of severe and sudden movements in financial markets" that followed Britain's vote to leave the EU.

"We reduced the leverage that we allowed our clients to utilise in the run up to the vote ... which meant we were able to get (clients) who had got the market wrong out of their positions before they ran out of money," Hetherington said.

IG reported that pretax profit had grown 7.6 percent to 207.9 million pounds ($274.57 million) for the year ended May 31, helped by growth in all regions.

Numis analysts raised their forecasts for the current fiscal year by 2 million pounds to 236 million pounds.

IG shares were down 0.1 percent at 844 pence at 0944 GMT, outperforming the FTSE midcap index, which was down 0.4 percent. ($1 = 0.7572 pounds) (Reporting by Esha Vaish and Noor Zainab Hussain in Bengaluru, editing by Sinead Cruise and Louise Heavens)