What Is the Role of an Escrow Service in Mitigating Counterparty Risk in OTC Derivatives?

An escrow service acts as a trusted third party that holds the collateral or assets of both parties in an Over-The-Counter (OTC) derivatives trade. This ensures that the terms of the agreement are met and that the assets are only released when the contract is properly settled.

By holding the assets, the escrow mitigates the risk of one party failing to honor their obligation (counterparty risk).