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 not in the contract itself, but in the design of the trading venue, including factors such as leverage caps, margin rules, and default management. The risk of systemic events is not inherent to perpetual futures, but rather a result of how the venue is structured. The real question is not whether perpetuals belong in regulated markets, but how a given venue is designed to manage risk. Regulatory requirements, such as segregated funds and oversight, are necessary to establish a baseline, but it is the venue's design choices that ultimately determine its safety. Institutions may not want perpetuals as a replacement for traditional futures, but they can be useful for hedging purposes, particularly when liquidity is a priority. The key to making perpetuals safe for institutional use is not to eliminate them, but to implement robust default management and risk containment measures, such as those used in regulated clearinghouses. By doing so, perpetuals can become a valuable tool for institutions, rather than a source of systemic risk.