June 8 (Bloomberg) -- Credit-default swaps traders are expediting an auction to settle General Motors Corp. contracts to ensure payouts are made before bonds disappear in a U.S.-led restructuring, according to people familiar with the matter.

A committee of dealers and investors will hold an auction June 12 to settle contracts protecting debt sold by GM, which President Barack Obama said he seeks to restructure “quickly” following a June 1 bankruptcy filing. Because of a plan in which bondholders would exchange debt for equity in the new company, traders opted to accelerate the auction, said four people, who declined to be identified because the discussions are private. Auctions typically are held about a month after a default.

The delay “provides clarification for the outstanding CDS and should allow the exchange to be less cluttered when and if it takes place,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

Dealers buy and sell bonds of the defaulting companies during the auction in order to set one price by which holders of the derivatives settle. Sellers of the contracts, which are used to hedge against losses or speculate on creditworthiness, pay the buyer face value, less the value of the underlying bonds.

The settlement will be the largest for the market since last year’s collapse of Lehman Brothers Holdings Inc.

Default Protection

Banks, hedge funds, insurance companies and other investors had bought or sold a net $2.31 billion of default protection on the automaker’s debt as of May 27, according to data from the Depository Trust & Clearing Corp., which runs a central registry that captures most trades. Another $776 million was bought through contracts on indexes that include GM, the largest U.S. automaker, among groups of companies, New York-based Depository Trust’s data show.

Investors holding about 54 percent of the Detroit-based carmaker’s bonds, or 975 institutions, agreed to support GM and the U.S. Treasury’s plan to swap their claims for equity and warrants, Elliot Sloane, spokesman for the ad hoc committee of GM bondholders, said May 31. GM offered bondholders a 10 percent equity stake and warrants for as much as 15 percent in exchange for their debt.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: June 8, 2009 15:16 EDT