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 will import instability. However, this critique is misplaced, as the risk is not inherent to the contract itself, but rather to the venue on which it is traded. The design of the venue, including factors such as leverage caps, margin requirements, and default management, is what sets the stage for potential systemic risk. The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of macro shocks, stablecoin de-pegs, exchange outages, and oracle failures, which have led to forced liquidations and a subsequent cascade of sell-offs. Nevertheless, it is the risk transmission mechanism, particularly the liquidation cascade, that transforms a sell-off into a systemic event. This is often the result of venue choices, such as a manipulable index that liquidates on false prices and auto-deleveraging that claws back profitable trades to cover a shortfall. Neither of these features is inherent to perpetual futures. The real question, therefore, is not whether perpetuals belong in regulated markets, but rather how a given venue is designed. Regulatory requirements are essential for establishing a baseline level of security, including segregated funds, a registered clearing entity, and supervisory oversight. How a venue handles defaults under stress is a separate consideration, and it can vary even within the regulated perimeter. A more significant objection to perpetuals is that institutions may not want them at all, as they are often seen as speculative rather than a replacement for regulated futures. A recent JPMorgan note found limited institutional appetite for perpetuals, citing their lack of term structure and basis risk, which makes them imperfect substitutes for dated futures. However, this perspective overlooks the fact that institutions are not seeking to use perpetuals as a replacement for dated futures, but rather as a tool for hedging delta, or directional exposure to the underlying price. Many institutions trading options on venues like Bullish use perpetuals to hedge delta because that is where the liquidity is. Term structure is less relevant to delta hedging than liquidity, and perpetuals offer the deepest, most continuously tradable delta-one instruments available. The liquidity edge of perpetuals is structural, driven by their design, which attracts retail flow and concentrates liquidity in these instruments. This is the overlooked prize in bringing perpetuals onshore: a deep, durable pool of liquidity in the instruments that hedging desks want. The two halves of the debate are, in fact, one. 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, the same thing that contains the systemic risk that critics fear. The question was never whether perpetuals are dangerous, but rather how a venue handles defaults when the market is under stress. Regulated clearing has established the standard for decades, which is also the standard that Bullish is building towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse. When a liquidation's shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging, which force-closes offsetting profitable positions at an off-market price. In contrast, the clearing model starts with the defaulter, whose own margin and fund contribution absorb the first loss, with the position worked off through the order book or, if large, auctioned to other clearing members. Behind this sits a pre-funded guaranty fund sized to regulated clearinghouse standards, with broad loss-sharing only beyond that, and rarely. While this does not completely eliminate risk, it breaks the chain that turns one blown-out account into a market-wide cascade, containing the failure at its source rather than transmitting it. 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. Meeting this standard makes perpetuals infrastructure that institutions can use; missing it creates the hazard that critics describe, regulated or not. Perpetuals were never the whole story; the design is.