The Misguided Debate Over Perpetual Futures and Systemic Risk

The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments will destabilize the market. However, this criticism is misplaced, as the true source of systemic risk lies not in the contracts themselves, but in the design of the trading venue. Factors such as leverage caps, margin rules, and default management play a crucial role in determining the level of risk. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is constructed to mitigate potential risks. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential for establishing a baseline level of security. Nevertheless, the way a venue handles defaults under stress is a separate consideration, and it can vary significantly even within regulated markets. A more valid concern is that institutions may not have an appetite for perpetual futures, treating them as speculative 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 the necessary liquidity. The liquidity edge provided by perpetual futures is structural, drawing in retail flow and concentrating liquidity in these instruments. This overlooked benefit of bringing perpetual futures onshore is the creation of a deep, durable pool of liquidity that can be safely utilized by institutions. The key to containing systemic risk is not the elimination of perpetual futures, but rather the implementation of institutional-grade default management. Regulated clearing has established a standard for managing defaults, which is also the standard that Bullish is working towards. By starting with the defaulter and using their own margin and fund contribution to absorb the first loss, and then working off the position through the order book or auctioning it to other clearing members, the risk of a market-wide cascade can be mitigated. This approach breaks the chain that turns a single default into a systemic event, and it is the difference between a venue that contains a failure and one that transmits it. Ultimately, the design of the trading venue, rather than the perpetual futures themselves, is the determining factor in managing systemic risk.