Aug. 26 (Bloomberg) -- Credit-default swaps dealers canceled 6,850 contracts linked to Thomson SA, eliminating duplicate trades worth $16 billion, according to derivatives service provider TriOptima AB.

Banks hold redundant contracts because they both buy and sell default protection on the same company with different customers. Tearing up offsetting swaps will make it easier to settle remaining contracts that may be triggered after Thomson deferred payments on private notes.

The electronics company’s credit event is the first since the so-called Small Bang standardized default swaps on European companies in July, allowing contracts triggered by debt restructuring to be settled at auctions. The Paris-based company is trying to reorganize 2.8 billion euros ($4 billion) of debt to avert bankruptcy.

“The industry is pursuing all opportunities to ensure the smooth operation of the new settlement process,” Henrik Nilsson, TriOptima’s head of product development, said in a statement.

Traders ruled Aug. 12 that Thomson’s deferral of a $72.5 million repayment on its 6.05 percent privately placed notes was a so-called restructuring credit event.

Investors bought or sold more than 11,000 individual swaps contracts worth a net $2 billion on Thomson debt as of Aug. 14, according to data compiled by Depository Trust & Clearing Corp. The trades have a gross notional exposure of $46 billion.

A further $2.5 billion of default protection with a gross exposure of $18 billion was traded through contracts on indexes.

Index Trades

Stockholm-based TriOptima eliminated 2,515 trades on portions of credit swaps indexes referencing Thomson on Aug. 14, according to the statement. The company operates a so-called portfolio compression platform that reduces the notional size of the credit derivatives market by canceling redundant trades. The process is a response to regulators’ efforts to clean up the privately negotiated derivatives market.

“The idea is to compress as much as possible and simplify positions as much as possible ahead of the auction so the decision-making process is easier,” said Matthew Leeming, head of European credit derivatives strategy at Barclays Capital in London. “It’s easier to determine the best course of action if you have a less complex position to manage.”

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Contracts tied to Thomson were quoted at 26.2 percent upfront and five percent a year, according to CMA DataVision. That means it costs 2.62 million euros in advance and 500,000 euros a year to protect 10 million euros of the company’s debt from default for five years.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

Last Updated: August 26, 2009 07:14 EDT