UPDATE 2-Auction sets Glitnir CDS payout over 97 pct

(Adds final auction results, background, details)

LONDON, Nov 5 (Reuters) - Sellers of protection on the debt of Icelandic bank Glitnir [GLBNK.UL] will pay more than 97 percent of the notional value of credit default swap contracts following a cash settlement auction.

Wednesday's auction, the second ever in Europe, set the value of CDS contracts on Glitnir senior debt at 3 percent and on subordinated debt at 0.125 percent, administrators Creditex and Markit said.

Iceland's three major banks have defaulted on their debt in the wake of the country's financial crisis, triggering payment of credit default swaps. (For related stories click on [ID:nLK438801] and [ID:nL3685960])

The first Icelandic bank auction on Tuesday for Landsbanki [LSBPEA.UL] set CDS values at 1.25 percent of par value on senior debt and 0.125 percent on subordinated debt [ID:nL4166319].

The third and last Icelandic bank auction is scheduled for Kaupthing KAUP.IC on Thursday.

The auction prices exceeded Glitnir's senior bond prices, bid at 1 cent on the euro and offered at 2 cents, but came in below recent prices on rarely traded subordinated debt at 0.75 cent bid and 3 cents offered.

The cash payout on Glitnir will be more than $1.94 billion, based on data from the Depository Trust & Clearing Corp., which operates the central electronic registry of CDS contracts.

DTCC has calculated gross notional value of outstanding Glitnir CDS contracts at $17.5 billion and the net value at $2.0 billion after taking into account offsetting positions.

The DTCC numbers may not be a definitive tally of all the cash that will be paid out, however, because dealers do not necessarily register all their transactions with the warehouse, BNP Paribas credit strategists say. (Reporting by Jane Baird and Natalie Harrison; editing by Simon Jessop)