The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments will import instability. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The venue's choices, such as leverage caps, margin rules, and default management, are what determine the level of risk.
The concern is not unfounded, as past deleveraging episodes in the crypto market have been caused by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. Nevertheless, it is the liquidation cascade, which is often triggered by venue choices, that turns a sell-off into a systemic event. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is designed.
Regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight, are essential for securing the baseline. However, how a venue handles defaults under stress is a separate choice, and it varies even within regulated markets.
A more significant objection to perpetual futures is that institutions may not want them at all. A recent JPMorgan note found limited institutional appetite for perpetuals, treating them as speculative rather than a replacement for regulated futures. This is correct in terms of mechanics, as perpetuals lack term structure and basis risk, making them imperfect substitutes for dated futures. Nevertheless, institutions are not using perpetuals as a replacement for dated futures, but rather to hedge delta, and they are drawn to perpetuals because of their liquidity.
The design of perpetuals, which concentrates liquidity, is the overlooked prize in bringing them onshore. The two halves of the debate are connected, as the liquidity institutions want already exists, drawn in large part by retail, and what lets them use it safely is institutional-grade default management. The question was never whether perpetuals are dangerous, but rather how a venue handles defaults when the market is under stress.
Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. When a liquidation's shortfall exceeds the insurance fund, the backstop is to socialize losses, whereas the clearing model works differently, starting with the defaulter and using a pre-funded guaranty fund. This approach breaks the chain that turns one blown-out account into a market-wide cascade, containing the failure rather than transmitting it.
Meeting this standard makes perpetuals infrastructure that institutions can use, while missing it creates the hazard that critics describe. The design is the key, not the perpetuals themselves.