The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage, retail-driven instruments could destabilize the market. However, this criticism is misplaced, as the risk is not inherent to the perpetual futures contracts themselves, but rather a result of the venue's design, including factors such as leverage limits, margin rules, index construction, and default handling.
The real question is not whether perpetuals belong in regulated markets, but how a given venue is built to manage risk. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential, but it is the venue's handling of defaults under stress that varies and can lead to systemic risk.
Another concern is that institutions may not want perpetuals at all, treating them as speculative rather than a replacement for regulated futures. However, many institutions use perpetuals to hedge delta, not as a substitute for dated futures, but because they offer liquidity. The liquidity edge of perpetuals is structural, drawn in by retail flow, and what allows institutions to use it safely is institutional-grade default management.
The debate surrounding perpetuals is not about their inherent danger, but about how a venue handles defaults when the market is under stress. Regulated clearing has established a standard for managing defaults, which is also the standard that Bullish is building towards. By containing defaults at their source, rather than transmitting them to the market, perpetuals can become a safe and useful tool for institutions.