The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage and retail involvement. However, this criticism is misplaced, as the risk is inherent to the venue's design, not the contract. Factors such as leverage caps, margin rules, and default management contribute to systemic risk, rather than the perpetual futures themselves. The real question is how a venue is constructed, including its ability to handle defaults and liquidations, which can either contain or transmit risk.
Regulatory requirements, such as segregated funds and oversight, are essential, but it is the venue's design that ultimately determines the level of risk. Institutions may not want perpetuals as a replacement for traditional futures, but they can be useful for hedging delta exposure, where liquidity is more important than term structure.
The liquidity provided by perpetuals can be a valuable asset for institutions, if managed properly with robust default handling and risk management. The debate surrounding perpetual futures is not about their inherent risk, but about how venues are designed to handle potential failures and liquidations. By prioritizing robust venue design and risk management, perpetuals can become a valuable tool for institutions, rather than a source of systemic risk.