The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments could destabilize the market. However, this critique is misdirected, as the risk is not inherent to the perpetual futures contract itself, but rather a result of the venue's design choices, such as leverage limits, margin rules, and default handling. The real issue is not whether perpetual futures belong in regulated markets, but how a given venue is constructed to manage risk. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential to establishing a baseline level of security. Nevertheless, the way a venue handles defaults under stress is a separate consideration, and it can vary even within regulated markets. A more significant concern is that institutions may not want perpetual futures at all, as they are often seen as speculative and not a suitable replacement for regulated futures. However, this perspective overlooks the fact that institutions use perpetual futures to hedge delta, not as a substitute for dated futures, but because they offer liquidity. The liquidity edge provided by perpetual futures is structural, drawn in by retail investors, and can be safely utilized by institutions with proper default management. 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 standards for managing defaults, and Bullish is working towards meeting these standards. By containing defaults at their source, rather than transmitting them to the broader market, venues can break the chain of risk that turns a single default into a market-wide cascade. This approach can make perpetual futures a viable infrastructure for institutions, rather than a hazard. Ultimately, the design of the venue, not the perpetual futures contract itself, is the key to mitigating systemic risk.