The Misguided Debate Over 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 contract itself, but rather a result of the venue's design. The real issue lies in the choices made by the venue, such as leverage caps, margin rules, and default management. The risk of systemic events, such as the October 2025 cascade, is not caused by perpetual futures, but rather by the liquidation cascade, which can be mitigated by proper venue design. The key to containing systemic risk is not to ban perpetual futures, but to ensure that the venue is built with robust risk management mechanisms, such as segregated funds, registered clearing entities, and supervisor oversight. In fact, institutions are not looking to replace traditional futures with perpetuals, but rather to use them as a tool for delta hedging, where liquidity is more important than term structure. By providing a deep and durable pool of liquidity, perpetuals can be a valuable tool for institutions, as long as they are traded on a venue with robust risk management mechanisms. The debate over perpetual futures is not about their inherent risk, but about the design of the venue and the ability to handle defaults in a way that contains systemic risk. By meeting the standards of regulated clearinghouses, perpetuals can become a safe and valuable tool for institutions, and the liquidity they provide can be a major benefit to the market.