(Adds dropped word "forex" to headline)
LONDON, July 8 (Reuters) - The world's top financial regulator is set to issue a consultation paper to banks making detailed proposals for changes to the way foreign exchange "fixings" are conducted, banking sources said on Tuesday.
The sources said banks expect the Financial Stability Board (FSB) to back the existing system of fixings but go into more detail than previously thought on potential changes to reduce the risk of market manipulation.
The FSB is due to report to the Group of 20 major economies later this year on reform of a range of financial market benchmarks and the first fruits of that have been expected for some time.
Senior players in the foreign exchange markets had thought it was likely to take a cautious approach on the currency fixings, preferring to wait for the conclusion of around a dozen regulatory investigations worldwide.
But two sources with knowledge of discussions with the FSB told Reuters that UK-based bankers and officials, concerned at the effect the row has had on markets which are central to London's role as a financial centre, had exerted pressure for faster moves to draw a line under the row.
While a number of different electronic and algorithmic alternatives to the existing fixes have been discussed, the sources said there was no appetite to turn away wholesale from the existing benchmarks.
"It has become clear that clients want the fix to remain and at this stage there will be no drastic changes to how it is calculated," one source told Reuters.
"But there will be measures to reduce manipulation. Most of the banks are providing some sort of input into this conversation. The next stage is they will come out with some sort of consultation paper. There certainly will be measures to reduce abuse within that."
Britain's Financial Conduct Authority and the U.S. Department of Justice opened investigations last year into allegations that senior traders shared market-sensitive information relevant for the London fix, which is set at 4 p.m. London time, using actual trades.
London is the hub of the global currency market, accounting for some 40 percent of the $5.3 trillion traded on an average day.
The WM/Reuters fix relates to exchange rates including the euro, sterling, Swiss franc and yen and are compiled using data from Thomson Reuters and other providers. They are calculated by WM, a unit of State Street Corp. Thomson Reuters is the parent company of Reuters News, which is not involved in the fixing process.
The FSB declined to make any comment.
While there have been anecdotal indications of a dip in volumes of trade around the 4 p.m. fix, bankers and asset managers say that overall the fund management industry has continued to use it.
They say asset managers are more concerned with wanting to ensure that their currency trades are done at a rate identical to the one by which their daily assets are valued. If rates differ, they can register a loss or a gain that then has to be explained to their clients.
"Some investors may reconsider their trading strategy. However, many are still concerned with tracking error and are still going to trade at the WM," said Klaus Paesler, head of currency and overlay strategy at Russell Investments in London.
"It seems the situation is at a bit of an impasse. Asset managers may want to trade away from the fix, but in many cases are benchmark sensitive so need to keep executing at the fix to reduce tracking error."
One source said the FSB could make a number of detailed proposals on changes to the mechanics of how fixing orders are lodged and dealt with to head off the potential for abuse.
As recently as a month ago, officials at a number of financial sector bodies were saying the FSB's planned preliminary report this summer would make only general observations about the need for unified codes of conduct and for benchmarks to be set in liquid markets.
The sources said on Tuesday that the consultation document was still being written, and that details of the changes it will propose to how orders are dealt with are still in flux.
But they pointed to discussions among some of the forex industry's major players over methods by which orders could be lodged direct by clients with third parties - either a fixing matching system like that unveiled recently by brokers EBS or a custodial bank.
That would give the market a process by which it would be impossible or at least difficult for the speculative community - essentially banks' spot desks, hedge funds and the major asset managers - to get hold of pooled fixing order information. (Editing by Catherine Evans)