Experts predicted that the Nov. 20 auction to settle CIT Group's credit default swaps is likely to be the largest the market has faced so far.

Some analysts say that due to the scope of the auction, the nature of the CIT valuation could have far-reaching effect on the CDS market.

Credit default swaps are derivatives contracts that insure securities against losses in the event of default.

Payments on CIT's credit default swaps (CDS) were automatically triggered with the company's Nov. 1 bankruptcy filing.

According to information from the Depository Trust & Clearing Corporation cited in The Wall Street Journal, the settlement targets 6,638 contracts outstanding as of Oct. 23, worth a net $3.1 billion. The auction will set a value for the CDSs, which will be used to close out positions.

According to a report from Reuters, an unexpectedly high CDS valuation during the CIT auction may favor protection sellers, while a low valuation could benefit protection buyers.

Meanwhile, some experts have downplayed the potential impact of the auction.

"The overall impact of CIT's default should be relatively contained given that its troubles have been well anticipated by the market, as evidenced by its recent spread history," Atish Kakodkar, analyst at credit research firm CreditSights, said in a recent report.

Auction administrators Creditex and Markit will oversee the proceedings.

Previously on monitordaily.com;

11/13/2009 - Auction to Resolve CIT Credit Default Swaps Set for Nov. 20