The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage and retail participation. However, the critique is misplaced, as the risk is inherent to the venue's design, not the contract.
The real risk factors include leverage caps, margin rules, and default management, which can be mitigated through proper venue design and regulatory oversight. The concern is not unfounded, as past deleveraging episodes have been triggered by various factors, including macro shocks and exchange outages.
The key to preventing systemic events is to implement a robust risk transmission mechanism, which is typically achieved through liquidation cascades. Venue choices, such as manipulable indexes and auto-deleveraging, can exacerbate the cascade, but these are not inherent features of perpetuals.
The real question is how a given venue is built and whether it can handle defaults under stress. Regulatory requirements, such as segregated funds and registered clearing entities, are essential, but the handling of defaults is a separate choice that varies even within regulated markets.
A more significant objection to perpetuals is that institutions may not want them, as they are seen as speculative and not a replacement for regulated futures. However, this perspective overlooks the fact that institutions use perpetuals to hedge delta, not as a substitute for dated futures, but because of their liquidity. The liquidity edge of perpetuals is structural, drawn in by retail participation, and provides a deep, durable pool of liquidity that institutions can use safely with 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 decades, which is also the standard that Bullish is building towards. By containing defaults at their source and preventing liquidation cascades, venues can break the chain that turns a blown-out account into a market-wide cascade, thereby mitigating systemic risk.