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 financial system. However, this criticism is misplaced, as the risk associated with perpetual futures is not inherent to the contracts themselves, but rather a result of the design of the trading venue. The true culprit behind systemic risk is the way in which venues are designed, including factors such as leverage caps, margin rules, index construction, and default management.
The risk of a liquidation cascade, which can turn a sell-off into a systemic event, is not a feature of perpetual futures, but rather a result of poor venue design. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is built. Regulatory requirements are necessary to establish a baseline level of safety, but the way in which a venue handles defaults under stress is a separate choice that can vary even within the regulated perimeter.
A more significant concern is that institutions may not want perpetual futures at all, as they may not be suitable as a replacement for regulated futures due to their variable funding and basis risk. However, institutions are not looking to use perpetual futures as a replacement for dated futures, but rather as a tool for hedging delta, and the liquidity of perpetual futures makes them an attractive option. The design of perpetual futures, which draws in retail flow and concentrates liquidity, is the overlooked prize in bringing them onshore. The key to safely using this liquidity is institutional-grade default management, which is the same thing that contains the systemic risk that critics fear.
The question is not whether perpetual futures are dangerous, but rather how a venue handles defaults when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. By starting with the defaulter and working off the position through the order book or auction, and having a pre-funded guaranty fund in place, the risk of a default can be contained, breaking the chain that turns one blown-out account into a market-wide cascade. This is the difference between a venue that contains a failure and one that transmits it, and it is the transmission that is the systemic risk that critics fear.