The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage retail trading. However, this critique is misdirected, as the true source of systemic risk lies in the design of the trading venue, including factors such as leverage limits, margin rules, and default handling.
The contract itself is not inherently risky. The real question is how a venue is constructed, with regulatory requirements providing a baseline for security, including segregated funds and oversight.
The key to mitigating risk is not the elimination of perpetual futures, but rather the implementation of robust venue design and default management. Institutions may not require perpetuals as a replacement for traditional futures, but they can utilize them for delta hedging due to their liquidity. The liquidity edge of perpetuals is structural, driven by retail demand, and can be safely harnessed by institutions through proper default management.
The debate surrounding perpetuals is not about their inherent danger, but about how venues handle defaults under stress. Regulated clearing has established a standard for managing defaults, and it is this standard that allows perpetuals to become a safe and useful tool for institutions. 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.