The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk due to their potential for high-leverage trading. However, this criticism is misdirected, as the risk is inherent to the venue's design, not the contract itself. The venue's choices, such as leverage caps, margin rules, and default management, dictate the level of risk. The recent crypto market deleveraging episodes, including the October 2025 cascade, were caused by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. The liquidation cascade, which is often triggered by forced liquidations and thin liquidity, is the primary mechanism for risk transmission. Nevertheless, this is not an inherent feature of perpetual futures. The real question is how a given venue is constructed, including its ability to handle defaults under stress. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential for securing the baseline. The way a venue handles defaults is a separate choice, and it varies even within the regulated perimeter. A more significant concern is whether institutions want perpetuals at all. A recent JPMorgan note found limited institutional appetite for perpetuals, citing their speculative nature and basis risk. However, this perspective overlooks the fact that institutions use perpetuals to hedge delta, not as a replacement for dated futures. The liquidity of perpetuals is a significant advantage, particularly in times of market stress. Many institutions trading options on Bullish's venue use perpetuals to hedge delta, taking advantage of the deep liquidity. The design of perpetuals, which concentrates liquidity, is the overlooked prize in bringing them onshore. The debate surrounding perpetuals is not about their inherent risk but about how venues handle defaults. Regulated clearing has established a standard for decades, which is also the standard Bullish is building toward. By containing defaults at their source, rather than force-feeding them into a falling market, the chain of risk transmission is broken. This is the difference between a venue that contains a failure and one that transmits it, and it is the transmission that critics fear. Meeting this standard is crucial for perpetuals to become infrastructure that institutions can use safely.