The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, but this criticism is misplaced. The true source of risk lies not in the perpetual futures contracts, but in the design of the trading venue, including factors such as leverage caps, margin rules, and default management. The risk of systemic events is not inherent to perpetual futures, but rather a result of how the venue is constructed. The real question is not whether perpetuals belong in regulated markets, but how a given venue is designed to handle stress and potential defaults. Regulatory requirements are necessary to establish a baseline level of security, but the key to mitigating systemic risk lies in the venue's design and its ability to contain and manage defaults. Institutions may not want perpetuals as a replacement for traditional futures, but they can be a valuable tool for hedging and managing risk, particularly when it comes to delta hedging. The liquidity provided by perpetuals is a significant advantage, and with proper design and management, they can be a safe and effective tool for institutions. The debate over perpetuals is not about their inherent risk, but about the design of the venue and its ability to manage and contain risk. By focusing on venue design and risk management, perpetuals can become a valuable infrastructure for institutions, rather than a source of systemic risk.