Okay, my system is back online and so I tried the suggestions laid out by Gonk. Based on a few A/B comparisons, the CD player using the Cambridge's DAC (via analog out plugged into the 970s 7.1 front L&R inputs) sounds noticeably better than the digital out on the Cambridge and the signal processed by the 970's DAC.

The 7.1 bass management setting is set to HPF/LPF. When you select 7.1 on the remote, the 970 displays "Bypass." This initally confused me, as I always associated "bypass" with "bypass mode," in which the digital bass management is out of the loop, the sub is disengaged and the front speakers run full range. (I think in this particular 7.1 set up, the "bypass" display must refer only to the fact that digital bass management is being bypassed, as the sub was defintely operating during playback).

The HPF/LPF setting defaults to an 80Hz x-over, which I prefer anyway, so I am happy with the results for far (I just wish there were an addtional input like this I could run my phono preamp into!)

Still to be tested is an A/B comparison between this current set up and the CD analog output in pure "bypass mode" (i.e. without sub).

I am hoping the 7.1 set up with the signal in the analog domain will result in less degradation of the soundstage compared to the convoluted analog/digital/analog path I was using before. But I will report back the results.