* EU plans to adopt U.S.-style supervisory model
* Euro clearing seen key to currency area's stability
* Forced relocation could be required as last resort
* Britain says market access part of Brexit talks (Adds UK finance ministry, EU lawmaker)
LONDON/BRUSSELS June 13 (Reuters) - 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, the bloc's executive said on Tuesday.
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 EU law would, as a last resort, force euro-denominated clearing business to shift from London if the volume was deemed by Brussels to be systemically important.
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 in 2019.
Valdis Dombrovskis, the European commissioner who proposed the draft law, said Brexit meant that "certain adjustments to our rules" are needed and that no business would be shifted just for the sake of it.
Britain's finance ministry said that the way that UK and EU firms access each other's markets is a matter for the forthcoming Brexit negotiations with Brussels.
"In the meantime, we stand ready to engage constructively on this legislation, fulfilling our obligations as a member state."
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.
This would mimic how U.S. regulators already have direct oversight of London clearing houses that handle dollar-denominated instruments, though there is no provision for forcing through a relocation of a clearing house.
Under the EU law, the bloc's regulators would have a say on the amount and type of collateral the clearing house holds, ensure it meets any additional requirements from the ECB, and hold on-site inspections.
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 17 clearers.
The second aim is to build on the existing system of "equivalence", whereby 28 non-EU clearers can serve customers in the bloc if they comply with rules similar to the EU's.
Two-tier equivalence means that the bulk of foreign clearers will continue under the existing system.
Others would be deemed "systemically important" and require enhanced supervision, with only a few likely to labelled as "substantially systemically important" and required to rebase to the bloc, a process that would be phased in over 18 months.
Brussels acknowledged that relocation could cause higher costs for users because of market fragmentation and has introduced "proportionate risk requirements" to mitigate this.
But some trades could be cleared more cheaply in the EU, officials said.
"If enhanced supervision does not work because it is so systemic, then there can be a decision to require relocation. That is a last resort," an EU source said.
ESMA would have to make a relocation recommendation, with input from the ECB, but the European Commission would take the final decision.
The European Commission decided not to include quantitative criteria for "systemic" clearing houses, such as caps on clearing volumes, leaving ESMA to make assessments case by case.
Simon Gleeson, a regulatory partner at international law firm Clifford Chance, said there is no question of UK clearing being forced to relocate.
"The issue is whether and to what extent the EU wishes to prevent EU banks from clearing euro trades outside the EU," Gleeson said.
"I think what is really going on here is the EU trying to create a bargaining chip that it can employ to get a more substantial say in the way that London clearing is regulated post-Brexit."
The draft law will need approval from EU states and the European Parliament, with changes likely.
"The Commission has lost its courage when it comes to euro clearing. The rule must be that euro clearing must be done under EU jurisdiction, no ifs or buts," said Markus Ferber, a vice chair of the parliament's economic affairs committee.
Most euro-denominated clearing of derivatives is performed by LCH, a unit of the London Stock Exchange and the largest clearer of interest rate swaps.
LSE chief Xavier Rolet said on Monday that relocation would have little financial impact because it has a clearing house in Paris that is fully authorised under EU rules.
A global derivatives industry body warned on Monday that shifting clearing of euro-denominated derivatives from London to the continent would require banks to set aside far more cash to insure trades, a cost that would be passed on to companies.
Officials from the Bank of England, which supervises LCH, have warned that euro clearing could shift to New York, but any U.S. clearing house that became a "systemic" clearer of euro-denominated instruments would also come under the new EU rules.
(Editing by David Goodman and Alexander Smith)