The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments could destabilize the market. However, this criticism is misdirected, as the risk is not inherent to the contracts but rather a result of the venue's design. The actual risk factors include leverage caps, margin rules, funding design, and default management, which are not inherent to perpetual contracts.

The real question is not whether perpetual futures belong in regulated markets, but how a given venue is constructed. Regulatory requirements are essential to establish a baseline, including segregated funds, a registered clearing entity, and supervisory oversight. How a venue handles defaults under stress is a separate issue, varying even within regulated markets.

A more valid concern is whether institutions truly want perpetual futures, given their limitations as a substitute for regulated futures. A recent JPMorgan note found limited institutional appetite for perpetuals, citing their speculative nature and inability to replace regulated futures due to basis risk and lack of term structure.

However, institutions are using perpetuals to hedge delta, leveraging their liquidity rather than seeking a replacement for dated futures. The liquidity edge of perpetuals is structural, drawing retail flow and concentrating liquidity.

This overlooked benefit of bringing perpetuals onshore is a deep, durable pool of liquidity in the instruments a hedging desk needs. The debate is not about the danger of perpetuals but about how a venue handles defaults under stress.

Regulated clearing has established standards for decades, which Bullish is working towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse. The key difference lies in the clearing model, which starts with the defaulter absorbing the first loss, followed by a pre-funded guaranty fund, and broad loss-sharing only in extreme cases. This approach breaks the chain that turns a single default into a market-wide cascade, containing the risk at its source rather than transmitting it.

Meeting this standard makes perpetuals infrastructure that institutions can use safely; failing to do so poses the hazard critics describe, regardless of regulation. The design of the venue, not the perpetuals themselves, is the critical factor in determining systemic risk.