The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, but the criticism is misplaced. The risk is not inherent to the contract itself, but rather a result of the venue's design, including factors such as leverage caps, margin rules, and default management. The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages.
However, the risk transmission mechanism, often in the form of a liquidation cascade, is what turns a sell-off into a systemic event. The real question is not whether perpetuals belong in regulated markets, but how a given venue is built and managed. Regulatory requirements, such as segregated funds and registered clearing entities, are necessary to secure the baseline, but it is the venue's handling of defaults under stress that varies and is crucial in determining the level of risk.
Another objection to perpetuals is that institutions may not want them, as they are seen as speculative and not a replacement for regulated futures. However, this perspective overlooks the fact that institutions use perpetuals to hedge delta, and the liquidity they provide is a key factor in their appeal. The design of perpetuals, which draws in retail flow and concentrates liquidity, is the overlooked prize in bringing them onshore.
The question is not whether perpetuals are dangerous, but how a venue handles defaults when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards.
By containing defaults at their source and preventing the transmission of risk, perpetuals can become a safe and useful tool for institutions.