The introduction of perpetual futures to regulated markets has sparked intense debate, with many warning of the potential for systemic risk due to high-leverage trading. However, this criticism is misplaced, as the risk is not inherent to the perpetual futures contract, but rather a result of the venue's design, including leverage limits, margin rules, and default handling.
The real issue is not whether perpetual futures belong in regulated markets, but how the venue is constructed to manage risk. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential to establishing a baseline level of security.
The key to mitigating systemic risk lies in the venue's ability to handle defaults under stress, which can vary significantly even within regulated markets. A more nuanced concern is whether institutions actually want to use perpetual futures, given their limitations as a replacement for traditional futures.
However, many institutions use perpetuals to hedge delta exposure, taking advantage of their liquidity, which is often deeper and more continuous than that of dated futures. The design of perpetual futures, which draws in retail flow, concentrates liquidity and creates a structural edge.
By providing institutional-grade default management, venues can allow institutions to safely utilize this liquidity, addressing the concerns of critics and containing systemic risk. The question is not whether perpetuals are dangerous, but how a venue handles defaults under stress.
Regulated clearing has established a standard for managing risk, and it is this standard that venues should strive to meet. By doing so, perpetuals can become a valuable tool for institutions, rather than a source of systemic risk.