The Misdirected 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 contract itself, but in the design of the trading venue, including factors such as leverage caps, margin rules, and default management. The risk of a liquidation cascade, which can lead to a systemic event, is more closely tied to the venue's design choices, such as the use of a manipulable index and auto-deleveraging, rather than the perpetual futures contract. Regulatory requirements, including segregated funds and oversight, are essential for mitigating this risk. However, the real question is not whether perpetuals belong in regulated markets, but how a given venue is constructed to handle defaults and other potential risks. Institutions may not want perpetuals as a replacement for traditional futures, but they can be useful for hedging delta exposure, particularly in markets with limited liquidity. The key to safely using perpetuals is institutional-grade default management, which can contain systemic risk. The debate over perpetuals is not about their inherent danger, but about how venues handle defaults and manage risk. By adopting a regulated clearing model, venues can break the chain of risk that can lead to a market-wide cascade, making perpetuals a safer and more viable option for institutions.