Default insurance on Greek debt won't be paid out, theInternational Swaps & Derivatives Association said after it wasasked to rule whether part of the nation's $170 billion bailout wasa credit event.

The group said the European Central Bank's exchange of Greekbonds for new securities exempt from losses being imposed onprivate investors hasn't triggered $3.25 billion of outstandingcredit-default swaps. ISDA's determinations committee, includingJPMorgan Chase & Co. and Pacific Investment Management Co.,said the switch didn't constitute subordination, one of thecriteria for a payout under a restructuring event.

“The situation in the Hellenic Republic is still evolving” andtoday's decisions “do not affect the right or ability to submitfurther questions,” ISDA said in a statement. The decision is notan expression of the committee's “view as to whether a credit eventcould occur at a later date,” the association said.

A swaps payout may still happen if Greece uses collective actionclauses on private investors who refuse to take so-called haircutson their debt holdings, according to ISDA's rules. Officialsincluding former ECB President Jean-Claude Trichet have opposedtriggering swaps because they're concerned traders would beencouraged to bet against failing nations and worsen Europe's debtcrisis.

“There's value to getting some clarity even if the ruling's no,”said Peter Tchir, founder of New York-based hedge fund TF MarketAdvisors. “It's a pretty big issue for what they're trying to do inother countries.”

It costs $7.3 million in advance and $100,000 annually to insure$10 million of Greek debt for five years, signaling a 95 percentprobability of default within that time.

Political determination to avoid the stigma of a credit eventhas been waning as Greece struggles to meet the conditions of itslatest 130 billion-euro ($170 billion) bailout. Standard &Poor's downgraded the nation to “selective default” on Feb. 27because of the government's decision to retroactively insert CACsinto bond terms.

While Greece is negotiating the biggest ever debt restructuring,the volume of credit-default swaps on the line has tumbled. The netamount of debt protected is no more than for some companies andrepresents less than one percent of the nation's bonds and loansoutstanding.

Credit-default swaps on Greece now cover $3.25 billion of debt,down from about $6 billion last year, according to the DepositoryTrust & Clearing Corp. That compares with a swaps settlement of$5.2 billion on Lehman Brothers Holdings Inc. in 2008.

Counterparty Concern

Despite concerns at that time about a daisy chain of losses ifcounterparties failed to meet their commitments, the Lehmansettlement and those of swaps guaranteeing debt of Fannie Mae andFreddie Mac were “orderly” and caused no major disruptions for themarket, according to regulators.

A settlement on Greek swaps may bolster confidence in the $258billion sovereign insurance market and also help boost thegovernment bond market, Tchir said. Efforts to circumvent a triggerrisk undermining credit markets.

“The relevance of sovereign CDS has been called into question,but they still have value,” said Georg Grodzki, head of creditresearch at Legal & General Plc in London.

Insurance payouts may still happen if Greece uses the collectiveaction clauses its parliament introduced or if it fails to make apayment in future. If an event is declared, auctions will be heldto set a recovery value on the bonds, and swaps sellers will paybuyers the difference between that and the face value of thedebt.

Swaps on western European governments can pay out on a creditevent triggered by failure to pay, restructuring or a moratorium onpayments. Restructuring events are the most subjective and havebeen removed as a trigger event for U.S. companies.

A restructuring event can be caused by a reduction in principalor interest, postponement or deferral of payments or a change inthe ranking or currency of obligations, according to ISDA rules.Any of these changes must result from deterioration increditworthiness, apply to multiple investors and be binding on allholders.

The determinations committee that decides whether to triggerswaps consists of representatives from 15 dealers and investors.The group, which also includes Deutsche Bank AG and the world'sbiggest money manager BlackRock Inc., rules whether a credit eventshould be declared after a request is made by a market participant.The question on Greece was posed anonymously.

'Pain to Come'

“Technically the issue of the ECB subordinating other investorshasn't yet inflicted pain — just the threat of pain to come,” saidBill Blain, a strategist at Newedge Group in London.

A request on Irish swaps was rejected last year when ISDA'sdeterminations committee ruled the International Monetary Fund'spreferential creditor status in that nation's rescue didn'tconstitute subordination.

“Restructuring almost always causes confusion,” Tchir said. “Thefact that it is a restructuring does leave it lot more subjectivethan it would be otherwise.”

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