The long-awaited arrival of regulated perpetual futures in the US has sent ripples through the financial sector, with trading firms and crypto exchanges swiftly moving to capture the substantial retail demand. However, traditional Wall Street banks are adopting a more cautious approach, choosing to wait until the market's liquidity, regulatory framework, and infrastructure are more established.
Perpetual futures, having garnered immense popularity within the crypto sphere, especially among international investors, are now poised to make a significant impact on the US market. The contracts, often referred to as 'perps,' differ from standard futures in that they do not have an expiration date, thereby eliminating the need for traders to close or roll over their positions regularly.
Instead, periodic funding payments ensure that the contract's price remains closely aligned with the underlying asset. This unique feature has contributed to the product's immense popularity, with Bank of America estimating that the annual volume of perpetual futures transactions could reach a staggering $90 trillion. Following the Commodity Futures Trading Commission's (CFTC) approval of Kalshi to offer these contracts, and with Coinbase also receiving the green light to list regulated perpetual futures in the US, the stage is set for a significant shift in the trading landscape. Nonetheless, inside Wall Street, the interest in perpetual futures does not necessarily translate to immediate adoption.
Discussions about perps are becoming more frequent, partly due to US regulators allowing markets that previously operated offshore to migrate onshore. However, most large financial institutions are still in the process of studying these products rather than preparing for major launches. Proprietary trading firms, market makers, and newer clearing firms are likely to be the first movers, as they have more flexibility to test new venues and accept operational risks without the stringent capital rules and client obligations that big banks face.
The potential applications of perpetual futures extend beyond mere speculation, as they could play a crucial role in managing weekend risk. Traditional futures markets are closed for part of the weekend, leaving traders exposed to significant risks. A liquid, 24-hour perpetual market could mitigate this risk, allowing firms to adjust their positions in real-time and use weekend prices to estimate where CME futures may reopen, thereby serving as both a hedge and a source of price discovery.
However, industry insiders caution that the demand must be substantial enough to justify the commitment of capital. The challenge lies in achieving the necessary depth, as a contract may trade continuously, but institutions may still face difficulties in moving large positions without significantly impacting the market. The regulatory landscape is also evolving, with debates emerging over whether certain perpetual contracts should be treated as futures or swaps, a distinction that affects margin rules, registration duties, and liquidity provision.
As the market continues to unfold, it is clear that Wall Street's view on perpetual futures is one of cautious optimism, with trading firms, regulators, and exchanges all recognizing the potential of this product. Yet, the largest banks are unlikely to take the lead, instead choosing to wait for the rules, liquidity, and infrastructure to mature before making their move.