The introduction of perpetual futures into regulated markets has sparked intense debate, with many warning of the potential for systemic risk. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The true concern lies in the choices made by the venue, such as leverage caps, margin requirements, and default management. The risk of a liquidation cascade, which can turn a sell-off into a systemic event, is often caused by flawed venue design, including manipulable indexes and auto-deleveraging.
Regulatory requirements, such as segregated funds and registered clearing entities, are essential for mitigating this risk. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is constructed. Some argue that institutions may not want perpetual futures at all, citing limited appetite and concerns over term structure and basis risk.
However, this overlooks the fact that institutions often use perpetuals to hedge delta, taking advantage of their liquidity. The design of perpetual futures, including their continuous tradability and lack of expiry, draws in retail flow and concentrates liquidity. This liquidity edge is structural and can be safely utilized by institutions with proper default management. The key to containing systemic risk is not the elimination of perpetual futures, but rather the implementation of institutional-grade default management.
Regulated clearing has established a standard for decades, and it is this standard that Bullish is working towards. By containing defaults at their source and preventing the transmission of risk, perpetual futures can become a valuable tool for institutions, rather than a hazard.