Another important distinction between futures and forwards is that the futures exchange guarantees to each party the performance of the other party, through a mechanism known as the clearinghouse. This guarantee means that if one party makes money on the transaction, it does not have to worry about whether it will collect the money from the other party because the clearinghouse ensures it will be paid. In contrast, each party to a forward contract assumes the risk that the other party will default.
An important and distinguishing feature of futures contracts is that the gains and losses on each party’s position are credited and charged on a daily basis. This procedure, called daily settlement or marking to market, essentially results in paper gains and losses being converted to cash gains and losses each day. It is also equivalent to terminating a contract at the end of each day and reopening it the next day at that settlement price. In some sense, a futures contract is like a strategy of opening up a forward contract, closing it one day later, opening up a new contract, closing it one day later, and continuing in that manner until expiration.