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 true risk lies not in the contracts but in the design of the trading venues. The risk is determined by factors such as leverage caps, margin requirements, funding design, and default management, which are inherent to the venue, not the contract. The real issue is how a venue handles defaults under stress, which can vary even within regulated markets. Regulatory requirements are essential for establishing a baseline, including segregated funds, registered clearing entities, and oversight. Nevertheless, the way a venue manages defaults is a separate consideration. A more valid concern is whether institutions actually want perpetual futures, given their limitations as a substitute for traditional futures. However, institutions use perpetuals to hedge delta, leveraging their liquidity, which is often deeper than that of dated futures. This liquidity edge is structural and drawn in part by retail flow. The key to safely utilizing this liquidity is institutional-grade default management, which is the same factor that mitigates systemic risk. The question should not be whether perpetuals are dangerous but how a venue handles defaults under stress. Regulated clearing has set a standard for decades, which includes absorbing losses through the defaulter's margin and fund contribution, followed by a pre-funded guaranty fund. This approach breaks the chain of risk transmission, containing failures rather than transmitting them as systemic risk. By meeting this standard, perpetuals can become a viable infrastructure for institutions; otherwise, they pose the hazards critics describe. The design of the venue, not the perpetuals themselves, is the critical factor.