The introduction of perpetual futures into regulated markets has sparked a heated debate, with critics warning of the potential for systemic risk due to high-leverage and retail-driven trading. However, this critique is misdirected, as the true source of systemic risk lies not in the contract itself, but in the design of the trading venue. The risk is determined by factors such as leverage caps, margin rules, and default management, which are inherent to the venue, not the contract. The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of macro shocks, stablecoin de-pegs, exchange outages, and oracle failures, leading to a liquidation cascade that can have far-reaching consequences.
Nevertheless, it is the venue's design that ultimately determines the risk transmission mechanism, and not the perpetual futures contract. The real question is not whether perpetuals belong in regulated markets, but rather how a given venue is constructed to handle defaults and manage risk.
Regulatory requirements are essential to establishing a baseline level of security, including segregated funds, registered clearing entities, and supervisory oversight. However, the way a venue handles defaults under stress is a separate consideration, and one that can vary significantly even within regulated markets. A more valid concern is that institutions may not have an appetite for perpetuals, treating them as speculative rather than a replacement for regulated futures.
However, this perspective overlooks the fact that institutions are using perpetuals to hedge delta, not as a substitute for dated futures, but because they offer the necessary liquidity. The liquidity edge of perpetuals is structural, driven by retail demand for continuously tradable instruments with no expiry or roll.
This design concentrates liquidity in perpetuals, making them the deepest and most tradable delta-one instruments available. The overlooked benefit of bringing perpetuals onshore is the creation of a deep, durable pool of liquidity that can be safely utilized by institutions.
The two halves of the debate are intertwined, as the liquidity institutions desire already exists, drawn in large part by retail, and what enables them to use it safely is institutional-grade default management. The question is not whether perpetuals are dangerous, but rather how a venue handles defaults when the market is under stress.
Regulated clearing has established a standard for decades, which is also the standard that Bullish is working towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse. When a liquidation shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging, force-closing offsetting profitable positions at an off-market price.
In contrast, the clearing model starts with the defaulter, whose own margin and fund contribution absorb the first loss, with the position worked off through the order book or auctioned to other clearing members. Behind this sits a pre-funded guaranty fund sized to regulated clearinghouse standards, with broad loss-sharing only beyond that, and rarely.
While this approach does not completely eliminate risk, it breaks the chain that turns one blown-out account into a market-wide cascade, containing the failure at its source rather than transmitting it. This is the difference between a venue that contains a failure and one that transmits it, and the transmission is the systemic risk that critics fear.
By meeting this standard, perpetuals can become infrastructure that institutions can use; missing it, we have the hazard that critics describe, regulated or not. Perpetuals were never the whole story; the design is.