When configured as an IdP, Identity Federation can enable the Federation Proxy to receive an Authentication Request from a remote SP partner.
Rather than authenticating the user locally, the IdP begins a second Federation SSO flow (SP2) with a second, remote IdP (IdP2). IdP2 then authenticates the user, creates an Assertion and redirects the user back to the Federation Proxy (IdP/SP2). The proxy validates the Assertion, identifies the user and resumes the first Federation SSO flow by creating a second Assertion and redirecting the user back to the original SP. With Federation Proxy, the first IdP is proxying the authentication to the second IdP.
The Federation Proxy does not refer to the HTTP Proxy settings listed under Federation Settings. That is used by Identity Federation to connect to remote servers when a firewall is present.
To use Federation IdP Proxy, the administrator configures Identity Federation to use FederationScheme for authentication rather than a local scheme (like LDAPScheme or BasicScheme). At runtime, if the user needs to be authenticated using the FederationScheme, Identity Federation will act as an SP and start the Federation SSO flow with a remote IdP.
There is an option to include the proxied Federation authentication method used by the second IdP in the Assertion created for the first SP. This is only possible if the Federation SSO operation between SP2 and IdP2 use the same protocol as the one used between SP1 and IdP1.