The Misguided Debate on Perpetual Futures and Systemic Risk

The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, but the criticism is misplaced. The risk is not inherent to the contract itself, but rather a result of the venue's design, including factors such as leverage caps, margin rules, and default management. The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of macro shocks, stablecoin de-pegs, and exchange outages. However, the root cause of these events is the liquidation cascade, which is often the result of venue choices such as manipulable indexes and auto-deleveraging. Perpetual futures are not inherently flawed, but rather, the issue lies in how a given venue is built and managed. Regulatory requirements are necessary to establish a baseline, but the key to mitigating systemic risk is a well-designed venue with robust default management. Institutions may not want perpetuals as a replacement for regulated futures, but they can be useful for hedging delta exposure. The liquidity edge of perpetuals is structural, and they can provide a deep and durable pool of liquidity for institutions. The debate surrounding perpetual futures is not about their inherent risk, but rather about how venues handle defaults and manage risk. By prioritizing institutional-grade default management, perpetuals can become a safe and useful tool for institutions.