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 contract itself, but rather a result of the venue's design. The true risk lies in the venue's choices, such as leverage caps, margin rules, and default management. 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.
The key to mitigating systemic risk is not to ban perpetual futures, but to ensure that venues are designed with robust risk management systems. Regulatory requirements, such as segregated funds and registered clearing entities, are essential, but it is also crucial to consider how a venue handles defaults under stress. The real question is not whether perpetuals belong in regulated markets, but how a given venue is built to manage risk. While some may argue that institutions do not want perpetuals due to their limitations as a replacement for regulated futures, the reality is that many institutions use perpetuals to hedge delta exposure.
The liquidity provided by perpetuals is a valuable asset, and with proper design and risk management, it can be a safe and effective tool for institutions. The debate over perpetual futures is not about whether they are dangerous, but about how venues can be designed to handle defaults and mitigate systemic risk. By prioritizing institutional-grade default management and regulated clearing, venues can provide a safe and liquid market for perpetual futures, and institutions can use them with confidence.