The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments could destabilize the market. However, this critique is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The true risk lies in the choices made by the venue, such as leverage caps, margin rules, funding design, and default management. The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of factors, including macro shocks, stablecoin de-pegs, exchange outages, and oracle failures.
The key factor that turns a sell-off into a systemic event is the risk transmission mechanism, often in the form of a liquidation cascade. This is where the venue's design plays a crucial role, as a manipulable index and auto-deleveraging can exacerbate the cascade. The real question is not whether perpetual futures belong in regulated markets, but how the venue is built to handle defaults and manage risk.
Regulatory requirements are essential to establish a baseline, including segregated funds, a registered clearing entity, and supervisory oversight. However, the way a venue handles defaults under stress is a separate choice, and it varies even within regulated markets.
A more significant objection to perpetual futures is that institutions may not want them, as they are often seen as speculative rather than a replacement for regulated futures. A recent JPMorgan note found limited institutional appetite for perpetuals, citing their lack of term structure and basis risk.
While this is correct in terms of mechanics, institutions are not using perpetuals as a substitute for dated futures. Instead, they use perpetuals to hedge delta, taking advantage of the liquidity they provide.
Many institutions trading options on Bullish's venue use perpetuals to hedge their directional exposure, not as a replacement for dated futures, but because that is where the liquidity is. Term structure is less relevant to delta hedging than liquidity, and perpetuals offer the deepest, most continuously tradable delta-one instruments available.
The liquidity edge of perpetuals is structural, drawn in by retail investors who are attracted to their continuous tradability and lack of expiry. This design concentrates liquidity in perpetuals, making them an essential tool for institutions managing risk in real-time. The debate around perpetual futures is often framed as a choice between risk and safety, but the two are not mutually exclusive.
The liquidity that institutions want already exists, drawn in large part by retail investors. What allows them to use it safely is institutional-grade default management, which is the same thing that contains systemic risk. The question is not whether perpetual futures are dangerous, but how a venue handles defaults when the market is under stress.
Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. When a liquidation's shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging, force-closing offsetting profitable positions at an off-market price.
In contrast, the clearing model starts with the defaulter, whose own margin and fund contribution absorb the first loss. The position is worked off through the order book or auctioned to other clearing members, with a pre-funded guaranty fund sized to regulated clearinghouse standards. This approach breaks the chain that turns one blown-out account into a market-wide cascade, containing the default at its source rather than transmitting it to the broader market.
By meeting this standard, perpetuals can become infrastructure that institutions can use safely, rather than a hazard that critics warn about.