The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, driven by high-leverage, retail-driven instruments. However, this criticism is misplaced, as the risk is inherent to the venue's design, not the contract. The actual risk factors include leverage caps, margin rules, funding design, and default management, which are not inherent to perpetual contracts. The concern is not unfounded, as past deleveraging episodes in crypto have been triggered by various factors, including macro shocks, stablecoin de-pegs, and exchange outages. The key factor that turns a sell-off into a systemic event is the risk transmission mechanism, typically a liquidation cascade. This cascade is fueled by venue choices, such as manipulable indexes and auto-deleveraging, rather than the perpetual contracts themselves. The real question is not whether perpetuals belong in regulated markets but how a given venue is designed. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential to secure the baseline. How a venue handles defaults under stress is a separate choice that varies even within regulated markets. A more valid concern is that institutions may not want perpetuals, as they are seen as speculative and lack term structure. However, institutions are using perpetuals to hedge delta, not as a replacement for dated futures, due to the liquidity they provide. The liquidity edge of perpetuals is structural, drawn in by retail, and can be safely utilized by institutions with proper default management. The debate surrounding perpetuals is not about their inherent danger but about how venues handle defaults under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. By containing defaults at their source, rather than transmitting them to the market, the chain of events that leads to a market-wide cascade can be broken. This is the key to making perpetuals a safe and useful infrastructure for institutions.