The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics arguing that these high-leverage instruments will pose a threat to the stability of the market. However, this critique is misguided, as the risk of systemic instability is inherent to the design of the trading venue, not the perpetual futures contracts themselves. The key factors that contribute to systemic risk include leverage limits, margin rules, index construction, and default handling.
These elements are not inherent to perpetual futures, but rather a result of the venue's design choices. The concern about systemic risk is not unfounded, as past episodes of deleveraging in the crypto market have been triggered by a combination of factors, including macro shocks, stablecoin de-pegs, exchange outages, oracle failures, over-leverage, and thin liquidity. The risk transmission mechanism, often in the form of a liquidation cascade, can turn a sell-off into a systemic event.
However, this is not a feature of perpetual futures, but rather a result of poor venue design. A well-designed venue, on the other hand, can mitigate systemic risk by implementing robust risk management measures, such as segregated funds, registered clearing entities, and regulatory oversight. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is built to handle stress and contain potential failures. Regulatory requirements are necessary to establish a baseline level of security, but the design of a venue's default handling and risk management systems 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, as they are often seen as speculative instruments rather than a replacement for regulated futures. However, this perspective overlooks the fact that institutions are using perpetual futures to hedge delta, not as a substitute for dated futures, but because they offer liquidity. Many institutions are drawn to perpetual futures because they provide a deep and continuously tradable market, which is essential for managing risk in real-time.
The liquidity edge offered by perpetual futures is structural, driven by retail flow, and concentrated in these instruments. This overlooked prize can provide a deep and durable pool of liquidity for hedging desks.
The two halves of the debate are intertwined: the liquidity that institutions want already exists, drawn in large part by retail, and what allows them to use it safely is institutional-grade default management, which is the same factor that contains systemic risk. The question is not whether perpetual futures are dangerous, but rather how a venue handles a default when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards.
A well-designed clearing model can break the chain that turns one blown-out account into a market-wide cascade, containing the risk at its source rather than transmitting it to the broader market. This is the difference between a venue that contains a failure and one that transmits it, and the transmission is the systemic risk that critics fear. By meeting this standard, perpetual futures can become infrastructure that institutions can use safely.