How Does a Futures Contract Introduce Counterparty Risk?

In a traditional, non-cleared futures contract (or forward contract), both parties are exposed to the risk that the other party may default before the contract's expiration. For example, the buyer might fail to pay or the seller might fail to deliver the underlying asset.

However, most modern futures contracts are traded on exchanges and cleared through a central clearing house, which acts as the counterparty to both sides, significantly mitigating this specific risk.