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 will pose a threat to the stability of the market. However, this criticism is misplaced, as the risk associated with perpetual futures is not inherent to the contract, but rather a result of the design of the trading venue. The real issue lies in the venue's choices regarding leverage limits, margin rules, index construction, and default handling. These factors, not the perpetual contract itself, determine the level of systemic risk. The recent deleveraging episodes in the crypto market, including the October 2025 cascade, were caused by a combination of factors such as macro shocks, stablecoin de-pegs, exchange outages, oracle failures, over-leverage, and thin liquidity. The liquidation cascade that occurred was not a result of the perpetual contract, but rather the risk transmission mechanism, which is usually triggered by forced liquidations, shared reference pricing, and arbitrage. The venue's design, including the use of a manipulable index and auto-deleveraging, can exacerbate this risk. Regulatory requirements, such as segregated funds, a registered clearing entity, and supervisory oversight, are necessary to establish a baseline level of safety. However, the way a venue handles a default under stress is a separate choice, and it varies even within regulated markets. A more significant concern is that institutions may not want perpetuals 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. However, this criticism misses the point, as institutions are not using perpetuals as a replacement for dated futures, but rather as a tool for delta hedging. Perpetuals offer liquidity, which is essential for hedging, and many institutions use them to manage their risk. The liquidity edge of perpetuals is structural, drawn in by retail flow, and this is the overlooked prize in bringing perpetuals onshore. The debate surrounding perpetuals is not about their inherent risk, but rather about how a venue handles defaults and contains systemic risk. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. By containing defaults at their source, rather than transmitting them to the market, perpetuals can become a safe and useful tool for institutions. The design of the trading venue, not the perpetual contract itself, is the key to mitigating systemic risk.