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 criticism is misplaced, as the risk is not inherent to the contracts but rather a result of the venue's design. Factors such as leverage caps, margin rules, and default management play a crucial role in determining the level of risk. The real issue is not whether perpetual futures belong in regulated markets, but how the venue is constructed to manage risk.
Regulatory requirements, such as segregated funds and oversight, are essential, but the way a venue handles defaults under stress is a separate consideration. Some argue that institutions may not want perpetual futures, citing their limitations as a replacement for traditional futures. However, this perspective overlooks the fact that institutions use perpetual futures to hedge delta, taking advantage of their liquidity.
The liquidity edge of perpetual futures is a structural advantage, drawn in by retail investors. By providing institutional-grade default management, venues can allow institutions to safely utilize this liquidity.
The question is not whether perpetual futures are dangerous, but how a venue handles defaults under stress. Regulated clearing has established a standard for managing risk, which is also the standard that Bullish is working towards.
By containing defaults at their source, rather than transmitting them to the broader market, venues can break the chain of risk that leads to systemic events. This is the key to making perpetual futures a safe and useful tool for institutions.