The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics arguing that these high-leverage instruments will destabilize the market. However, this critique is misguided, as the risk is not inherent to the contracts, but rather a result of the venue's design. The real issue lies in the choices made by the venue, such as leverage limits, margin rules, index construction, and default handling.
The risk of systemic events is not caused by the perpetual futures themselves, but by the liquidation cascade that can occur when a venue is poorly designed. This cascade can be triggered by a variety of factors, including macro shocks, stablecoin de-pegs, exchange outages, oracle failures, over-leverage, and thin liquidity. The key to preventing such events is not to ban perpetual futures, but to ensure that the venue is designed with robust risk management mechanisms, such as segregated funds, a registered clearing entity, and a supervisor's oversight.
Furthermore, institutions are not looking to use perpetual futures as a replacement for regulated futures, but rather as a tool for hedging delta exposure. The liquidity provided by perpetual futures is a valuable asset for institutions, and with proper design and risk management, it can be a safe and effective tool for managing risk. The debate over perpetual futures should focus on the design of the venue, rather than the contracts themselves, and how to ensure that the venue is built to contain risk, rather than transmit it. By meeting the standards of regulated clearing and providing a safe and robust trading environment, perpetual futures can become a valuable infrastructure for institutions, rather than a source of systemic risk.