Red codes are used to identify or match reference obligations – the underlying benchmark bonds – and reference entities to confirm trades with counterparties. The use of Red codes as part of the trade confirmation process was designed to reduce the basis risk and compliance burdens to ensure liquidity in the market by establishing consistent standards.
When liquidity providers began using the Depository Trust & Clearing Corporation (DTCC), a payment processing and confirmation service, for credit default swaps (CDS) in November 2003 in conjunction with Red, the workload for trade confirmations was significantly reduced, as exchanging and agreeing termsheets between two DTCC-member counterparties was no longer necessary.
The establishment of Red greatly assisted the establishment of a liquid European CDS market, according to Guy America, head of credit trading for Europe at JP Morgan. “A common platform is the most efficient way of making sure you have up-to-date information about the entity you’re about to trade,” he said.