The introduction of perpetual futures to regulated markets has sparked intense debate, with many warning of the potential for systemic risk due to high-leverage trading. However, this criticism is misplaced, as the risk is inherent to the venue's design, not the contract. The actual risk factors include leverage caps, margin rules, index construction, and default management, which are not inherent to perpetual futures.
The concern is not unfounded, as past deleveraging episodes have been triggered by various factors, including macro shocks, stablecoin de-pegs, and exchange outages. The key factor that turns a sell-off into a systemic event is the risk transmission mechanism, typically a liquidation cascade. This is often caused by venue choices, such as a manipulable index and auto-deleveraging, which are not features of perpetual futures.
The real question is how a given venue is designed, including regulatory requirements such as segregated funds, a registered clearing entity, and supervisory oversight. The way a venue handles defaults under stress is also crucial and can vary even within regulated markets.
A more significant objection to perpetual futures is that institutions may not want them, as they are often seen as speculative and lack term structure. However, institutions use perpetual futures to hedge delta, taking advantage of their liquidity, which is often deeper than that of dated futures. This liquidity edge is structural, drawn in by retail traders who prefer perpetual futures due to their continuous tradability. The overlooked benefit of bringing perpetual futures onshore is the creation of a deep, durable pool of liquidity that institutions can utilize safely.
The debate surrounding perpetual futures is not about their inherent danger but about how venues handle defaults when the market is under stress. Regulated clearing has established a standard for managing defaults, which is also the standard that Bullish is working towards. By containing defaults at their source and preventing liquidation cascades, venues can break the chain that turns a single failure into a market-wide event, thereby reducing systemic risk.