Brussels is launching a fresh raid on the City's lucrative clearing houses as it attempts to force banks to shift business to the European Union.

The European Commission has unveiled legislation that will give the EU a share of London's derivatives trading, which handles trillions of euros a year.

Commissioners insisted that the move was not a power grab, saying that the new rules were needed to protect Europe from the risk to financial stability posed by the large amounts of derivatives cleared in London.

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."

It comes as Rishi Sunak prepares to water down City regulatory reforms and abandon the use of the term “Big Bang 2.0”, further distancing the Government from radical proposals set out by his predecessor Liz Truss.

Jeremy Hunt, the Chancellor, and Andrew Griffith, the City minister, are expected to unveil a more muted package of reforms on Friday at a meeting with finance executives in Edinburgh.

European plans to onshore a larger proportion of derivatives clearing would bring it under the remit of EU regulators, which lost their control over London after Brexit.

Clearing houses have become increasingly important since the financial crisis. They sit in the middle of derivatives traders and ensure that sellers get paid even if a buyer goes bust.

Under the bill, European traders will be required to have accounts with continental houses for clearing a portion of derivative contracts that are deemed particularly risky by EU financial supervisors.

Banks will be encouraged to handle more transactions through an EU clearer or face capital charges.

Mr Dombrovskis said: “In the event of a crisis, we must be able to have continuous and immediate oversight.”

The commission rejected accusations it was trying to poach a bigger slice of the trillions of euros in derivatives cleared in London.

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."

Brussels has tried to wean itself off UK clearing since Brexit, which put London in competition with European centres like Frankfurt and Paris. However, efforts to encourage clearing relocation voluntarily to Europe after Brexit have so far failed.

Speaking to reporters in Brussels, Mr 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.”

Mairead McGuinness, the EU financial services commissioner, said the proposal was “very measured” and would make Europe more resilient.

Brussels also set out plans to cut red tape on company listings, improve insolvency rules and reduce reliance on non-EU financial centres for raising capital.

The bill must be approved by EU governments and the European Parliament before it can become law.

Britain is attempting to prevent a gradual erosion of the City's dominance through market reforms aimed at making it a more attractive place to do business.

However, there are signs that the proposals are being watered down in the face of sceptical regulators who do not want to increase financial risk.

A Treasury source said ministers will stop describing the plans using Liz Truss's phrase “Big Bang 2.0”, which was a direct echo of Margaret Thatcher’s deregulation of the Square Mile in the mid-1980s.

Instead, Mr Hunt has rebranded the package the “Edinburgh Reforms”.

The reform package is expected to include a relaxation of ring-fencing rules on some banks.

It could also include changes to the Mifid 2 rulebook - regulation around financial research - as well as deregulation of trading rules to boost flexibility for investors and plans to reduce the influence of proxy voting agencies, which have been criticised for pushing a left-wing agenda in the City.

The Treasury source added: “The actual policies haven’t really changed. It’s just branding.”

The EU refused to grant almost all UK financial services access to the Single Market after Brexit under the so-called equivalence regime, even though the City and the EU had identical rulebooks.

But clearing of euro-denominated derivatives for banks and asset managers in the EU was allowed to continue in case relocating large volumes in a short time caused market disruption.

In February, Brussels extended the period of equivalence to UK clearing houses until June 2025. Ms McGuiness insisted it would be the final time equivalence was granted.

The Bank of England Governor Andrew Bailey said the deadline was a bad idea and that fragmenting the international financial market could not be justified.