The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, but this criticism is misplaced. The true source of risk lies in the design of the trading venue, including factors such as leverage caps, margin rules, and default management, rather than the perpetual futures contracts themselves. The risk of systemic events is more closely tied to the mechanism of risk transmission, often triggered by liquidation cascades, which can be mitigated by proper venue design and regulatory oversight. The real question is not whether perpetual futures belong in regulated markets, but how a given venue is constructed to handle potential risks. Regulatory requirements, such as segregated funds and registered clearing entities, are essential, but the way a venue manages defaults under stress is also crucial. While some argue that institutions may not want perpetual futures due to their limitations as a replacement for regulated futures, many institutions use perpetuals to hedge delta, leveraging their liquidity. The key to safely utilizing perpetuals is institutional-grade default management, which can contain systemic risk. The debate surrounding perpetual futures should focus on how venues handle defaults under stress, rather than the contracts themselves. By meeting regulatory standards and implementing effective default management, perpetuals can become a valuable tool for institutions, rather than a source of systemic risk.