UPDATE 1-How London's gold and silver prices are 'fixed'

* Market benchmarks being reviewed in wake of Libor affair

* Five banks take part in twice-daily pricing process forgold

* CFTC had talks on gold, silver fixes: Commissioner O'Malia

By Veronica Brown

LONDON, March 14 (Reuters) - London's gold and silvermarkets face the possibility of a probe alongside otherbenchmarks into price setting, putting a century-old practiceunder the spotlight after the Libor rigging scandal that exposedwidespread interest rate manipulation by banks.

The U.S. Commodity Futures Trading Commission has engaged in"a couple" of conversations about whether the daily setting ofgold and silver prices in London is open to manipulation,Commissioner Scott O'Malia said on Thursday, although he saidthe situation is "fairly immature in its development."

The Wall Street Journal, citing unnamed sources, reported onWednesday that the CFTC was examining various aspects of goldand silver price-setting, including whether it is sufficientlytransparent.

"What was stated in that story was more than I think we'redoing," O'Malia told reporters at the annual Futures IndustryAssociation conference in Florida on Thursday.

"I think we've had a couple of conversations. We're lookingat energy, indexes, prices, how they're set. We'll look at allof the range of index-setting," O'Malia said.

The CFTC declined to provide an official comment, while thechairs of the London Gold Fixing Company and London SilverFixing Company were not available for comment.

Another CFTC Commissioner Bart Chilton, known as anoutspoken proponent of regulation to protect investorsand consumers, declined to specifically address the report,saying: "Given the clubby manipulation efforts we saw in Liborbenchmarks, I assume other benchmarks - many other benchmarks -are legit areas of inquiry."

Britain's Financial Services Authority (FSA) also declinedto comment on whether it was looking into gold and silver pricesetting, but said on Thursday it is feeding into a wider reviewof price benchmarks run by the International Organisation ofSecurities Commissions (IOSCO) - a global umbrella group formarkets regulators.

IOSCO is set to publish a report in May with principles onhow to compile important benchmarks to avoid rigging.

The setting, or "fix", of the gold price in London datesback to 1919, originally involving NM Rothschild & Sons, Mocatta& Goldsmid, Samuel Montagu & Co, Pixley & Abell and Sharps &Wilkins. Silver price setting started in 1897.

Currently, gold fixing happens twice a day by teleconferencewith five banks: Bank of Nova Scotia-ScotiaMocatta,Barclays Bank Plc, Deutsche Bank AG, HSBCBank USA, NA and Société Générale. The fixings areused to determine prices globally.

Chairmanship of the Gold Fixing rotates annually among themember banks.

At the start of each gold price-fixing, the chairmanannounces an opening price to the other four members who relaythat to their customers, and based on orders received from them,instruct their representatives to declare themselves as buyersor sellers at that price.

The gold price is adjusted up and down until demand andsupply is matched at which point the price is declared "Fixed".

The fixings are used to determine spot prices for thebillions of dollars of the two precious metals traded each day.

Buyers and sellers can get insight on price changes and thelevel of interest during the fixing process. They can cancel,increase or decrease their interest based on that information.

Gold and silver price setting has long been the subject ofdebate, and the CFTC looked at complaints about the silvermarket in 2008.

But most believe that the process is transparent.

"The fix is open, consequential, transparent and has stoodthe test of time. It's not open to manipulation in the same wayas Libor," said Ross Norman, chief executive of bullion brokerSharps Pixley.