The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage trading and potential market instability. However, this criticism is misguided, as the true source of risk lies not in the perpetual futures contract itself, but in the design of the trading venue. Factors such as leverage caps, margin rules, funding design, and default management all contribute to the level of risk associated with these contracts.
The concern is not unfounded, as past episodes of market volatility have been exacerbated by factors such as macro shocks, stablecoin de-pegs, and exchange outages. Nevertheless, it is the liquidation cascade, often triggered by venue-specific design choices, that transforms a sell-off into a systemic event. The key to mitigating this risk lies in the implementation of robust venue design and regulatory requirements, including segregated funds, registered clearing entities, and supervisory oversight. A more nuanced critique of perpetual futures is that they may not be suitable for institutional investors, who may prefer traditional futures contracts with term structures and delivery options.
However, institutions are using perpetual futures to hedge their delta exposure, taking advantage of the deep liquidity and continuous tradability of these contracts. The liquidity edge provided by perpetual futures is a structural advantage, driven by the participation of retail traders.
By combining this liquidity with institutional-grade default management, perpetual futures can become a valuable tool for institutions. The question is not whether perpetual futures are inherently dangerous, but rather how a venue handles defaults and contains potential systemic risk. Regulated clearing has established a standard for managing defaults, and it is this standard that will determine the safety and efficacy of perpetual futures in regulated markets.