“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,” the 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.

Most euro-denominated clearing of derivatives is performed by LCH, a unit of the London Stock Exchange (LSE.L) and the largest clearer of interest rate swaps used by companies to hedge against unexpected moves in borrowing costs.

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 European continent would require banks to set aside far more cash to insure trades against defaults, 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.

Details of the draft law were first reported by the Financial Times on Monday.

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