The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments could destabilize the market. However, this critique is misplaced, as the risk is not inherent to the contracts, but rather a result of the venue's design choices, such as leverage limits, margin rules, and default handling. The real issue is not whether perpetual futures belong in regulated markets, but how a given venue is constructed to manage risk.
Regulatory requirements, such as segregated funds and oversight, are essential, but the key to containing systemic risk lies in the venue's ability to handle defaults and liquidations. The debate over perpetual futures is not about their inherent risk, but about the design of the venues on which they are traded.
Institutions are not looking to replace traditional futures with perpetuals, but rather to use them as a tool for hedging delta exposure, where liquidity is more important than term structure. The liquidity edge of perpetuals is structural, drawn in by retail flow, and can be safely utilized by institutions with proper default management. The question is not whether perpetuals are dangerous, but how a venue handles defaults under stress. Regulated clearing has established a standard for managing defaults, and it is this standard that will determine whether perpetuals can be used safely by institutions.
By containing defaults at their source, rather than transmitting them to the broader market, venues can break the chain of risk that turns a single account blowout into a market-wide cascade. This is the key to making perpetuals a viable infrastructure for institutions, rather than a systemic risk.