Which method is commonly used to mitigate counter-party defaults?

Utilizing cross-default provisions is an effective method to mitigate counter-party defaults because it ensures that if a counter-party defaults on one obligation, it triggers a default on all other outstanding obligations as well. This mechanism encourages the counter-party to maintain compliance with all agreements to avoid triggering a broader default scenario, which puts the pressure on them to uphold their financial responsibilities.

Cross-default provisions protect lenders and investors by linking multiple financial agreements and creating a more comprehensive risk management approach. This is particularly important in scenarios where a counter-party may have different financial instruments with the same lender or investor. By having such provisions in place, the risk of loss due to a default on one contract is reduced by providing an incentive for the counter-party to maintain overall solvency.

While other methods such as creating standby letters of credit or setting up payment escrow accounts also serve important functions in risk management, they are more focused on providing specific financial assurances or controlling cash flows, rather than establishing a direct connection between multiple obligations that can enhance overall credit risk mitigation. Risk-sharing agreements may similarly reduce risk but do not provide the comprehensive default management feature that cross-default provisions offer.