The introduction of perpetual futures into regulated markets has sparked intense debate, with critics warning of potential systemic risks. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The key factors that contribute to systemic risk include leverage limits, margin rules, index construction, and default handling. 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, oracle failures, over-leverage, and thin liquidity.
The liquidation cascade that ensues can have a devastating impact on the market, but this is not a feature of perpetual futures. Instead, it is the result of poor venue design, such as manipulable indices and auto-deleveraging.
The real question is not whether perpetual futures belong in regulated markets, but how a given venue is built to mitigate these risks. Regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight, are essential in establishing a baseline for safety.
However, the way a venue handles defaults under stress is a separate issue, and one that varies even within regulated markets. A more pressing concern is whether institutions truly want perpetual futures, with some arguing that they are not a suitable replacement for regulated futures due to their lack of term structure and basis risk. Nevertheless, institutions are using perpetual futures to hedge delta, not as a substitute for dated futures, but because they offer liquidity. This liquidity edge is structural, drawn in by retail investors who are attracted to the continuous tradability of perpetual futures.
The key to safely utilizing this liquidity is institutional-grade default management, which is the same factor that contains systemic risk. The debate surrounding perpetual futures is not about their inherent danger, but about how venues handle defaults under stress. Regulated clearing has established a standard for decades, and it is this standard that Bullish is working towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse. By containing defaults at their source, rather than transmitting them to the wider market, venues can break the chain that turns a single failure into a market-wide cascade.
This is the difference between a venue that contains a failure and one that transmits it, and it is this transmission that critics fear. By meeting this standard, perpetual futures can become a valuable infrastructure for institutions to use, rather than a hazard.