A trust relationship between identity providers that lets users authenticate with their own organization and access another organization's resources without creating new accounts. The trust doesn't have to be bidirectional.
In SC-900 it is contrasted with directory services such as AD DS. It is also one of the hybrid identity options (for example, with AD FS), along with password hash synchronization and pass-through authentication.
Identity federation is a concept that can show up on the exam. Check the full guide to see it in context.