This Loc. has Led lighting, and cab lighting with a single lame horn sound function. You know the one. The deooder is a wired 8 pin type.
What is the smaller board stuck under the long upper board, with 2 large black capacitors, and a round black slightly domed circle on it for? The main board is connected to it with an orange wire. A black and red wired go to the speaker. Thanks in advance.
If I retrofit a 60987 msd/3 mfx 8 pin sound decoder, do I keep this board?

I have the 37537 Br 120 that is cream and red in color with a metal body. On mine, the decoder is double-sided sticky taped to the base of the chassis. On top of it are the 2 cylinder type electronics you describe. I do not know what they are, but I assumed they were capacitor-like electronics also. Above these 2 cylinders is the sound decoder, and sticky taped to the bottom of the main circuit board platen which is above it. This lok runs well on my >20+ year old K tracks that have a lot of sections where the electrical contact to the shoe and wheels are not good due to dirt accumulation. Light locomotives with poor contact do stop on these parts of the tracks. This lok is very heavy and runs well with no hesitation. That is why I agree the electronic cylinders may act with a capacitor function.

I also had the 37538 (E120 marked on the side of the cream and red body). This one ran very poorly with lots of hesitation. I did not like it, and I cannibalized it for body parts when the decoder was acting up and died. It did not appear to have the capacitor-like electronics.

I have the black 37530 (black, Das Original Gibt's bei Marklin, written on the side) and it runs extremely well on my poor contact tracks. It does have a big electronic thing that is color coded red, red, black, white. I am assuming this has to have a capacitor-like function. I like this lok and it runs extremely well at slow speeds with no hesitation.

All 3 have metal bodies (very heavy) and with different electronics and decoders as they were manufactured on different years. Stay away from 37538 as I consider the electronics in it are not as good as the other 2.

Check the impedance of the speaker. New decoders work with impedances in the range 4 Ohm to 16 Ohm. The speaker may have a rather high impedance of 32 Ohms, 50 Ohms, or even higher. No damages, but sound level will be rather low.