A market for buying and selling financial instruments. The most important feature of an exchange - as opposed to other kinds of markets - is "novation," in which the exchange takes the other side of the trade (is the counterparty) for any party coming to buy or sell a security. This service means that the party coming to the exchange is guaranteed delivery of the cash or security, against its security or cash. By contrast, the Over-the-Counter (OTC) market presents the risk that a counterparty could fail on a trade. OTC trades thus involve specific counterparty credit risk, while exchange trades involve the lower risk of system failure.