The market will pay out $2.5-billion (U.S.) to creditors who have bought insurance-like products to protect them from a Greek default, according to results of an auction on Monday.
Fourteen dealer banks set a value of 21.75 per cent of par for Greek bonds, which means credit default swaps will have to pay 78.25 cents on the euro to settle contracts triggered by the nation's debt restructuring, which led to the declaration of a credit event earlier this month.
This works out at a market-wide payout of $2.5-billion in an auction being held under the rules of the International Swaps & Derivatives Association, the industry body.
The results had little impact on the market, as it is a small amount that had been widely expected.
The auction process was launched after investors were forced to exchange their bonds at a loss in the biggest-ever debt restructuring.
The auction ends more than two years of speculation over whether the derivatives are viable for insuring sovereign debt after European policy makers sought to prevent payouts on concern they would prompt a deterioration in the region's crisis.
Some market participants warn that sovereign credit default swaps, a relatively new instrument, may suffer because of confusion ahead of the payouts over which bonds should be used for delivery in the settlement process and concerns that some creditors will receive a better deal than others.
One CDS trader said: "The problem has been over the differing prices of bonds in the market, meaning a holder of new bonds may end up with a worse deal than holders of old international bonds."
However, Elisabeth Afseth, an analyst at Investec, said: "The fact that it [the CDS market]works means it can remain a viable hedging instrument and used for trading purposes as well."
That is considered important, she added, because "the product is there as a hedge for other sovereign investors, and significant risk remains in Europe."
Sellers of protection will pay buyers face value in exchange for the underlying securities or the cash equivalent.