UPDATE 2-CDS payout for 3 Icelandic banks about $7.3 bln

(Wraps together three auctions, adds background and details)

By Jane Baird

LONDON, Nov 6 (Reuters) - The combined cash payout on credit default swaps of Iceland's three major banks -- Landsbanki, Glitnir and Kaupthing -- will amount to around $7.3 billion based on the results of cash settlement auctions this week.

The banks defaulted on their debt in the wake of the country's financial crisis, triggering payment of credit default swaps and the first ever CDS cash settlement auctions in Europe. (For related story on their bonds click on [ID:nLK438801] and for a factbox on the auction process [ID:nL3722184])

Three auctions in three days set the payouts for Landsbanki Islands [LSBPEA.UL] at about 99 percent, for Glitnir [GLBNK.UL] at more than 97 percent and for Kaupthing KAUP.IC at more than 93 percent, based on numbers provided by auction administrators Markit and Creditex.

The date for sellers of protection to hand over the cash is set for Nov. 20.

Analysts expect these payments to have little effect on financial markets, however, because there was little difference between the auction results and underlying bond prices.

Protection sellers have already had to put up almost the entire payment amount as collateral in the weeks leading up to the auction as the market values of the banks' debt declined.

The notional value of net exposures in the credit derivatives market are $1.8 billion for Landsbanki, $2 billion for Glitnir and $3.8 billion for Kaupthing, or $7.6 billion altogether, according to calculations by the Depository Trust & Clearing Corp. (DTCC), which operates the central electronic registry for the market.

The combined payout of around $7.3 billion exceeds the net cash payments of around $5.2 billion for settling CDS for Lehman Brothers (LEHMQ.PK) and $1.3 billion for Washington Mutual (WAMUQ.PK), according to DTCC data.

Credit strategists at BNP Paribas caution, however, that registration with the DTCC is voluntary, does not include all trades in the market, and so could understate cash transfers.

The payments will add to rising default losses for synthetic collateralised debt obligations (CDOs) on top of the defaults of Lehman and Washington Mutual.

Out of 3,771 synthetic CDOs rated by Standard & Poor's Corp. globally, the portfolios of 9 percent of them including one Icelandic bank, another 9 percent two Icelandic banks and 14 percent, all three, data from S&P and Barclays Capital show.

CDO portfolios typically include CDS on 100 to 150 corporate names, so the three defaults could amount to losses of up to 3 percent for some CDOs.

The auctions set values for Kaupthing senior debt at 6.625 percent of notional value and for its subordinated at 2.375 percent; for Glitnir senior debt at 3 percent and subordinated at 0.125 percent; and for Landsbanki senior debt at 1.25 percent and subordinated at 0.125 percent.

(Editing by David Cowell)