What characteristic differentiates futures contracts from forward contracts?

Futures contracts are distinguished from forward contracts primarily by their trading environment, which is on organized exchanges. This structured marketplace allows futures to have standardized terms, including contract size, expiration dates, and settlement procedures, thereby enhancing liquidity and market transparency. The presence of an exchange mitigates counterparty risk since the clearinghouse acts as an intermediary, ensuring that both parties fulfill their contractual obligations.

In contrast, forward contracts are typically custom agreements made directly between two parties and are not traded on an exchange. This lack of regulation means they can vary significantly in terms and conditions, leading to higher counterparty risk and lower liquidity. Futures contracts also require daily settlement through marking to market, which is not applicable for forwards, contributing to their distinct operational framework.

Thus, the fact that futures are conducted on organized exchanges sets them apart from forwards and is essential for understanding their functioning within financial markets.