The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures into regulated markets has sparked a heated debate, with critics warning of the potential for systemic risk due to high-leverage instruments driven by retail traders. However, this criticism is misguided, as the risk is not inherent to the contract itself, but rather a result of the venue's design choices, 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 factors, including macro shocks, stablecoin de-pegs, and exchange outages. Nevertheless, the risk transmission mechanism, often in the form of a liquidation cascade, is what turns a sell-off into a systemic event. This cascade is usually fueled by venue choices, such as a manipulable index that liquidates on false prices and auto-deleveraging that claws back profitable trades to cover a shortfall. Neither of these features is inherent to perpetual futures. The real question is not whether perpetuals belong in regulated markets, but rather how a given venue is constructed. Regulatory requirements, such as segregated funds, a registered clearing entity, and supervisory oversight, are necessary to establish a baseline. However, the way a venue handles defaults under stress is a separate choice, and it varies even within the regulated perimeter. A more pertinent objection to perpetuals is that institutions may not want them at all, 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 true from a mechanical perspective, perpetuals are not being used as a replacement for dated futures, but rather as a tool for hedging delta, where liquidity is more important than term structure. Many institutions trading options on Bullish's venue use perpetuals to hedge their directional exposure, taking advantage of the deep liquidity pool. This liquidity edge is structural, driven by retail flow, and is the overlooked prize in bringing perpetuals onshore. The two halves of the debate are intertwined: the liquidity institutions want already exists, drawn in large part by retail, and what lets them use it safely is institutional-grade default management, which also contains the systemic risk critics fear. The question was never whether perpetuals are dangerous, but rather how a venue handles defaults under stress. Regulated clearing has established a standard for decades, which is also the standard Bullish is building toward. When a liquidation's shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging, forcing the closure of 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, and the position is worked off through the order book or auctioned to other clearing members. A pre-funded guaranty fund, sized to regulated clearinghouse standards, provides an additional layer of protection. This approach breaks the chain that turns one blown-out account into a market-wide cascade, containing the failure at its source rather than transmitting it. By meeting this standard, perpetuals can become infrastructure institutions can use; missing it would pose the hazard critics describe, regulated or not. The design, not the contract, is the key to mitigating systemic risk.