The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, driven by high-leverage, retail-led trading. However, the criticism is misplaced, as the risk is inherent to the venue's design, including leverage limits, margin rules, and default handling, rather than the contract itself. The real question is how a venue is built, with regulatory requirements providing a baseline for security.
The handling of defaults under stress is a critical choice that varies even within regulated markets. A more significant concern is whether institutions want perpetuals at all, with some arguing they are speculative and lack term structure.
Nevertheless, institutions use perpetuals to hedge delta, leveraging their liquidity, which is often deeper than that of dated futures. The key to safe usage is institutional-grade default management, which contains systemic risk. The debate surrounding perpetuals is not about their inherent dangers but about how venues handle defaults under stress. Regulated clearing has established a standard for decades, which 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 broader market, perpetuals can become a valuable infrastructure for institutions.