The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, but this criticism is misplaced. The true source of risk lies in the design of the trading venue, including factors such as leverage limits, margin rules, and default handling. Perpetual futures are not inherently risky, but rather it is the venue's design that determines the level of risk. The risk of liquidation cascades, which can lead to systemic events, is not a feature of perpetuals but rather a result of poor venue design. Regulatory requirements are necessary to establish a baseline for safety, but the key to mitigating risk lies in the venue's ability to handle defaults and liquidations. Institutions may not want perpetuals as a replacement for traditional futures, but they can be useful for hedging purposes due to their liquidity. The real question is not whether perpetuals belong in regulated markets, but rather how a given venue is designed to handle risk. By prioritizing institutional-grade default management and liquidity, perpetuals can become a valuable tool for institutions, rather than a source of systemic risk.