What I have understood is that the overnight index swap is bootstrapped to discount rates/zero rates that in their turn are considered risk free. The reason being, that the reference rate of such swap - which is the overnight uncollateralized lending between banks - corresponds to overnight lending, which is close to risk-free due to its very short period.
However, what I have also understood is that settlement of these overnight swaps are usually at maturity or annually for swaps longer than 1 year. The credit risk in such swap is thus actually the same as the credit risk in any LIBOR referencing swap due to the fact that settlement/maturity occurs further in the future, allowing for more counterparty credit risk. The only difference being the reference, that is, either LIBOR or the overnight rate. It thus means that in both cases there is an additional spread on both swap rates to adjust for the swap's credit risk.
Now, one may argue that the credit risk in such swap is very small, however, the fact that we collateralize swaps, is to me, an indication that the credit risk is sufficiently significant.
Are these observations correct? If they are, how good is the approximation of the overnight index swap really to risk-free? And if they are not, please correct me.