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 risk is not inherent to the contracts but rather a result of the venue's design.
The true concern lies in the venue's choices, such as leverage caps, margin rules, and default management. The risk of a liquidation cascade, which can lead to a systemic event, is not a feature of perpetuals but rather a result of poor venue design. Regulatory requirements, such as segregated funds and a registered clearing entity, are necessary to mitigate this risk.
The real question is not whether perpetuals belong in regulated markets but how a given venue is built to handle stress and default. Institutions may not want perpetuals as a replacement for regulated futures, but they can be used to hedge delta, and their liquidity makes them an attractive option.
The design of perpetuals draws in retail flow, concentrating liquidity and making them the deepest, most continuously tradable delta-one instruments available. Institutional-grade default management is key to containing systemic risk and allowing institutions to use perpetuals safely.
The debate surrounding perpetuals is not about their inherent danger but about how a venue handles defaults and stress. Regulated clearing has established a standard for decades, and Bullish is building towards this standard.
By designing a venue that can contain failures and absorb defaults, perpetuals can become a valuable tool for institutions, rather than a source of systemic risk.