New rules from the European Commission to promote financial stability will see the European Union take a share of the City's multi-trillion pound derivatives trading business.
The regulations would govern the clearing houses that act as the middle men in derivatives trades.
The move is required to alleviate the risk to financial stability in Europe of having so much derivatives trading clearing concentrated in London, according to the European Commission, as reported by The Telegraph.
Valdis Dombrovskis, the Commission's executive vice president, said: "We need to reduce our excessive exposure to non-EU clearing houses because it poses significant risks to our market stability."
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The plans would bring a greater amount of derivatives trading back to Europe and under the remit of EU regulators, rather than the UK Financial Conduct Authority.
They would require European traders to have accounts with local clearing houses for a portion of derivative contracts that are deemed particularly risky by EU financial supervisors.
Clearing houses have become increasingly important since the financial crisis. They ensure sellers get paid even if a buyer goes bust.
Banks will be encouraged to handle more transactions through an EU clearer or face capital charges.
Dombrovskis said: "In the event of a crisis, we must be able to have continuous and immediate oversight."
The European Commission was not trying to move derivatives business from London to the European Union, he added.
It said: "The requirement does not imply that all clearing should be repatriated to the EU. It covers only a portion of the relevant activities and does not forbid clearing in other jurisdictions."
Speaking to reporters in Brussels, Dombrovskis said: "[The proposal] will make sure that the EU has a safe, robust and attractive clearing system that can withstand economic shocks.
"We also want to incentivise more clearing activity in the EU itself to the extent needed to safeguard financial stability."
