The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments will destabilize the market. However, this critique is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design choices, such as leverage caps, margin rules, and default management. The real question is not whether perpetuals belong in regulated markets, but how a given venue is constructed to mitigate risk.
Regulatory requirements, such as segregated funds and registered clearing entities, are essential, but it is the venue's handling of defaults under stress that is crucial in preventing a systemic event. In reality, institutions are not looking to replace traditional futures with perpetuals, but rather use them to hedge delta exposure, taking advantage of the liquidity they provide. The key to safe and effective use of perpetuals is institutional-grade default management, which contains systemic risk.
The debate surrounding perpetuals is not about their inherent danger, but about how venues handle defaults, and regulated clearing has established a standard for managing risk. By meeting this standard, perpetuals can become a valuable tool for institutions, providing a deep and durable pool of liquidity.