Bank of France Governor Christian Noyer's comments turn up the heat on Britain, which is fighting a European Central Bank plan to require clearing houses that handle a substantial amount of euro-denominated derivatives trades, such as London-based LCH.Clearnet, to be located in the euro zone.

Noyer, who also sits on the ECB's governing council, said in a Bank of France overview of global derivatives market reforms that the processing of foreign currency-denominated instruments with a "systemic dimension" for the issuers must be located in the relevant currency area.

Noyer has made similar comments in the past and these latest could be a signal that the ECB is not willing to back down.

Britain has already gone to the European Union's highest court to challenge the ECB policy plan, which could pose a threat to the City of London financial centre.

The focus on providing back-up for derivatives trades is part of efforts to make these products safer after the financial crisis, when the near-collapse of U.S. insurer AIG exposed the risks of the opaque derivatives markets.

The reforms, in which clearing plays a central role, has prompted new entrants into the clearing business such as ICE (>> IntercontinentalExchange Inc), CME (>> CME Group Inc) and others which want to clear European trades from London, the bloc's biggest trading centre.

Large volumes of euro-denominated transactions are executed and cleared in London but Britain is not part of the single currency area.

Clearing is where a third party, backed by a default fund, ensures a transaction is completed even if one side of the trade goes bust.

Noyer said the central bank in the currency area should also have "oversight authority over the (clearing houses)infrastructure, with direct and permanent powers so that it can compel it to take the necessary measures to guarantee its security and its efficiency."

From next year, the ECB will become the main supervisor for the region's biggest banks but currently clearing houses are mainly regulated in the country where they are based.

The Group of 20 economies (G20) agreed in 2009 to introduce mandatory clearing and reporting of derivatives transactions to help regulators spot risks more easily.

The G20 set a deadline of end 2012 to complete the reforms but the European Union and United States are still rolling out or finalising some rules.

(Reporting by Huw Jones. Editing by Jane Merriman)

By Huw Jones