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(Writes through, adds background, further Wheatley comments)
By Huw Jones and Li-mei Hoang
LONDON, Sept 9 (Reuters) - Banks are struggling to stamp outactivity at the root of alleged manipulation in foreign exchangemarkets, the chairman of Britain's Financial Conduct Authority(FCA) watchdog told a parliamentary committee on Tuesday.
The FCA and U.S. regulators are investigating allegationsthat dealers at major banks colluded and manipulated keyreference rates in the $5.3 trillion a day foreign currencymarket, the world's biggest and least regulated.
"I think all the banks are really struggling as to how theystamp out that alleged activity," Wheatley said. "I know all ofthem are deeply embarrassed by what's happened and want to seethat change. I know that they have put in place remedialaction."
However Wheatley did not identify any specific issues thebanks were struggling with and did not name any of the banksaffected.
Ethical standards in the foreign exchange market have beenput under a harsh spotlight since investigators in the UnitedStates, Europe and Asia started examining whether small groupsof traders colluded to rig prices by sharing information abouttheir clients' orders.
The global inquiry has not yet concluded but the review hasshaken the industry, with dozens of top dealers put on leave orfired and banks under pressure to sharpen up oversight of theirtraders.
TIGHTER SURVEILLANCE
Since regulators started investigating the market, bankshave tightened surveillance of employees' communications,including clamping down on the use of online chatrooms, where traders were alleged to have swapped information, and havehanded over reams of transcripts to regulators to help them intheir probe.
Source familiar with the inquiry have told Reuters that thetone of messages between foreign exchange traders was similar tothe sort of exchanges used by traders to manipulate the Londoninterbank offered rate or Libor.
The Libor scandal has cost banks such as Barclays and UBS some $6 billion in penalties and banks arebracing themselves for potentially more fines and litigationstemming from the FX probe.
"It's very unfortunate that we've had what appears to beabuse in a number of sectors in the market follow on from theLibor fines," Wheatley said.
Speaking more broadly, Wheatley said regulators were lookingat what else needed to be done to boost confidence in wholesalelending markets in the wake of the Libor and forex probes.
"We have not solved it yet. It's still a work in progress,"Wheatley said. "It's such a priority for us to clean up thesemarkets and give people their confidence back."
There are likely to be legislative changes after a reportinto Britain's wholesale markets is published in June 2015, headded. (Editing by Louise Ireland and David Holmes)
