The introduction of perpetual futures into 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 inherent to the venue on which the perpetuals are traded, not the contracts themselves.
The real issue lies in the design of the venue, including leverage limits, margin rules, index construction, and default handling. The risk of systemic events, such as liquidation cascades, is exacerbated by venue choices, not the perpetual contracts.
Regulatory requirements, such as segregated funds and registered clearing entities, are essential to mitigate this risk. The true question is not whether perpetuals belong in regulated markets, but how a given venue is constructed to manage risk. Institutions may not want perpetuals as a replacement for regulated futures, but they can be useful for hedging delta exposure. The liquidity of perpetuals, driven in part by retail flow, is a valuable asset for institutions.
By implementing institutional-grade default management, venues can provide a safe and reliable platform for institutions to utilize perpetuals. The key to containing systemic risk is not to eliminate perpetuals, but to design venues that can handle defaults effectively, using regulated clearing standards and pre-funded guaranty funds. This approach breaks the chain of risk transmission, allowing perpetuals to become a valuable infrastructure for institutions.