The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk due to their association with high-leverage, retail-driven instruments. However, this critique is misdirected, as the true source of risk lies in the design of the trading venue, including factors such as leverage caps, margin rules, and default management, rather than the perpetual contracts themselves. The risk of systemic events, such as liquidation cascades, is more closely tied to the venue's design choices, like manipulable indexes and auto-deleveraging mechanisms, than to the contracts.
Regulatory requirements, including segregated funds and oversight, are essential for establishing a secure baseline, but the handling of defaults under stress is a critical venue-specific decision. A more significant concern is that institutions may not have an appetite for perpetual futures, treating them as speculative rather than a replacement for regulated futures due to their limitations, such as variable funding and basis risk. However, institutions are using perpetuals to hedge delta exposure, leveraging their liquidity, which is often deeper than that of dated futures.
The key to safely utilizing perpetuals is institutional-grade default management, which contains systemic risk. The question should focus on how a venue handles defaults under stress, rather than the inherent risk of perpetuals.
Regulated clearing has set the standard for managing defaults, and Bullish is working towards this standard. By containing defaults at their source, rather than transmitting them to the broader market, the risk of systemic events can be mitigated, making perpetuals a viable infrastructure for institutions.