The European Union plans to give itself powers to move euro clearing business away from London's financial sector to the EU after Brexit and adopt a model closer to that operated by the United States, a source close to the situation said.
The financial industry has warned that forced "relocation" would split markets, bump up trading costs and diminish the status of the euro - as well as threaten thousands of jobs in the City of London.
The draft law due to be published later on Tuesday would, as a last resort, force euro-denominated clearing business to shift from London to the bloc if the volume was deemed by Brussels to be systemically important, the source said.
The bulk of clearing in euro-denominated derivatives is performed in London and involves a third party standing between two sides of a trade to ensure its smooth and safe completion.
The European Central Bank (ECB) and euro zone policymakers have long wanted control over euro clearing, saying it is core to the single currency area's financial stability and would be outside the EU's regulatory sphere once Britain leaves the bloc in 2019.
Under the draft law, if the European Securities and Markets Authority (ESMA) decides that a non-EU clearer is handling "systemically" important volumes of euro-denominated business, a system of "enhanced supervision" would be introduced, the source said.
This would mimic how U.S. regulators already have direct oversight of London clearing houses that handle dollar-denominated instruments, including direct access to sensitive data.
The first aim of the law is to centralise supervision of EU-based clearing houses, with ESMA taking the lead, backed by central banks such as the ECB.
At present, national supervisors oversee clearers.
The second aim is to build on the existing system of "equivalence", whereby a non-EU clearer can serve customers in the bloc if it complies with rules that are similar to the EU's.