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 trading. However, this criticism is misplaced, as the risk is not inherent to the perpetual futures contract, but rather a result of the venue's design. The venue's choices, such as leverage caps, margin rules, and default management, are the primary factors that determine the level of systemic risk. The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages.
Nevertheless, the risk transmission mechanism, which is often the liquidation cascade, is what turns a sell-off into a systemic event. This cascade is typically fueled by venue choices, such as a manipulable index and auto-deleveraging, rather than the perpetual futures contract itself. The real question is not whether perpetual futures belong in regulated markets, but how a given venue is designed. Regulatory requirements, such as segregated funds, a registered clearing entity, and supervisory oversight, are necessary to establish a baseline level of security.
However, the way a venue handles defaults under stress is a separate choice, and it can vary even within the regulated perimeter. A more pertinent objection to perpetual futures is that institutions may not want them at all. A recent JPMorgan note found limited institutional appetite for perpetuals, viewing them as speculative rather than a replacement for regulated futures. This is correct in terms of mechanics, as perpetuals lack a term structure and basis risk, making them imperfect substitutes for dated futures.
Nevertheless, institutions are not using perpetuals as a replacement for dated futures, but rather to hedge delta, as they offer the deepest and most continuously tradable delta-one instruments available. The liquidity edge of perpetuals is structural, drawn in by retail traders who are attracted to the no-expiry and continuously tradable nature of the contracts.
This liquidity is the overlooked prize in bringing perpetuals onshore, as it provides a deep and durable pool of liquidity for hedging desks. The two halves of the debate are intertwined, as the liquidity that institutions want already exists, drawn in large part by retail traders. What allows institutions to use this liquidity safely is institutional-grade default management, which is the same factor that contains the systemic risk that critics fear. The question was never 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 building 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, which force-closes 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, and the position is worked off through the order book or auctioned to other clearing members. A pre-funded guaranty fund, sized to regulated clearinghouse standards, sits behind this, with broad loss-sharing only beyond that, and rarely.
This approach 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. Meeting this standard makes perpetuals infrastructure that institutions can use, while missing it creates the hazard that critics describe, regardless of regulation. Perpetuals were never the whole story; the design is.