The Misguided Debate on 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 could destabilize the market. However, this criticism is misplaced, as the risk is not inherent to the perpetual futures contract itself, but rather a result of the venue's design. The key factors that contribute to systemic risk include leverage caps, margin rules, index construction, 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. The liquidation cascade that ensues can have a devastating impact on the market, but this is not a feature of perpetual futures themselves. Instead, it is the result of venue choices, such as the use of manipulable indexes and auto-deleveraging. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is designed to handle stress and default. Regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight, are essential for establishing a baseline level of security. However, the way a venue handles defaults under stress is a separate choice that can vary even within regulated markets. A more significant objection to perpetual futures is that institutions may not want them at all, as they are seen as speculative and not 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 correct in terms of mechanics, it misses the point of how institutions actually use perpetuals. Many institutions use perpetuals to hedge delta, not as a substitute for dated futures, but because they offer the deepest and most continuously tradable delta-one instruments available. The liquidity edge of perpetuals is structural, drawn in by retail flow, and this is the overlooked prize in bringing perpetuals onshore. The two halves of the debate are one: the liquidity institutions want already exists, drawn in large part by retail, and what lets them use it safely is institutional-grade default management. The question was never whether perpetuals are dangerous, but rather how a venue handles a default when the market is under stress. Regulated clearing has established the standard for decades, which is also the standard that Bullish is building towards. When a liquidation's shortfall outruns the insurance fund, the backstop is to socialize losses, but the clearing model works differently. It 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. Behind that sits a pre-funded guaranty fund sized to regulated clearinghouse standards, with broad loss-sharing only beyond that, and rarely. 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. Meet that standard, and perpetuals become infrastructure that institutions can use; miss it, and we have the hazard that critics describe, regulated or not. Perpetuals were never the whole story; the design is.