The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk due to their potential for high-leverage and retail-driven trading. However, this criticism is misguided, as the risk is not inherent to the contract itself, but rather a result of the venue's design, including leverage limits, margin rules, and default handling.
The real question is not whether perpetuals belong in regulated markets, but how a given venue is constructed to mitigate these risks. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential, but it is the venue's choices, like index construction and auto-deleveraging, that can either contain or transmit risk. Institutions may not want perpetuals as a replacement for regulated futures, but they can be useful for hedging delta exposure, where liquidity is more important than term structure.
The liquidity edge of perpetuals is structural, drawn in by retail, and can be safely utilized by institutions with proper default management. The key to containing systemic risk is not to eliminate perpetuals, but to ensure that venues are designed to handle defaults in a way that breaks the chain of liquidation cascades. This can be achieved through regulated clearing, where the defaulter's own margin and fund contribution absorb the first loss, and a pre-funded guaranty fund provides a backstop. By meeting these standards, perpetuals can become a valuable infrastructure for institutions, rather than a hazard.