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* LBMA settles on silver fix replacement after 2-month hunt
* New mechanism heralds change in precious metals benchmarks
By Clara Denina and Jan Harvey
LONDON, July 11 (Reuters) - CME Group and Thomson Reuters will operate an electronic silver benchmark when the 117-year-old "fix" is disbanded in August, in a move widely seen preceding sweeping reforms of precious metals price-setting.
The London Bullion Market Association (LBMA) said in a statement on Friday that CME Group will provide a price platform and methodology for the daily process, while Thomson Reuters is responsible for administration and governance.
CME/Thomson Reuters will start testing the new process in early August after the closely contested competition to produce a solution.
The silver fix - used by producers, consumers and investors - is set every day at noon by three banks via a conference call, working out a price at which their customers are willing to buy and sell the metal.
But with increased attention from regulators in the wake of benchmark manipulation in other markets, the current operator - London Silver Market Fixing Ltd - said in May it would stop running the daily call.
The LBMA consulted market participants with the aim of producing a transparent electronic alternative that complies with toughened regulatory benchmarking standards.
The association received seven proposals. The main contenders also included the London Metal Exchange (LME) and technology provider Autilla, which had this week joined forces; U.S. derivatives exchange Intercontinental Exchange, and U.S. news agency Bloomberg.
The new price mechanism is electronic, auction-based and auditable, the LBMA said. It is also tradeable with an increased number of direct participants.
"The winner of the silver fixings is of course the first who would have his hat in the ring when it comes to conducting the other fixings," said one market participant who took part in the LBMA consultation.
The overhaul of the silver fix is likely to mark the beginning of a major revamp of precious metals benchmarks, including the century-old gold fix and the platinum and palladium fixes.
Some of the companies that had proposed alternatives to the silver fix said they would be ready to assist the gold market, should the current benchmarking process be reformed.
The LME said "we are ready to expand our range of products to further service the industry".
A CME statement said: "We regularly review the market landscape and global dynamics of the gold market, and we continue to talk with customers and market participants about new and innovative ways to help them manage their global price risk."
The World Gold Council held a discussion among buyers and sellers of gold last week on ways to reform the price benchmark.
Financial details of the service to be provided by CME Group and Thomson Reuters were not disclosed.
Although market participants view many aspects of the existing gold process favourably, reforms still need to comply with the 19 principles on financial benchmarks outlined in July 2013 by the International Organization of Securities Commissions (IOSCO), an umbrella body of market regulators.
"In the end, we had a workable structure, and two large organisations with plenty of experience behind them in terms of systems and compliance, and regulatory issues," said Jonathan Spall of G Cubed Metals Ltd, which conducted an independent review for the LBMA as part of the selection process.
Thomson Reuters already works with the LBMA to administer Gold Forward Offered Rates, used in swap deals.
The banks involved in the current silver fixing are Deutsche Bank, HSBC and Bank of Nova Scotia-ScotiaMocatta.
Deutsche Bank's decision earlier this year to leave the gold and silver fix process raised questions about the future of the precious metals benchmarking system.
Barclays Plc and Societe Generale operate the gold fixing, along with Scotia and HSBC, while Deutsche Bank stopped in May after two decades.
A senior British regulator said last week when answering lawmakers' questions on the trustworthiness of the gold market that collusion among banks in setting the gold benchmark was possible, but there is no evidence of this.
(Editing by Veronica Brown and Dale Hudson)