The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk due to their potential for high-leverage trading. However, this critique is misplaced, as the risk is inherent to the venue's design, not the contract.
The actual risk factors include leverage caps, margin requirements, funding design, and default management, none of which are inherent to perpetual contracts. Recent deleveraging episodes in crypto have been caused by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages, which have triggered liquidation cascades. The violence of these cascades is often exacerbated by venue choices, such as manipulable indexes and auto-deleveraging mechanisms, rather than the perpetual contracts themselves. The real question is how a given venue is designed and built, with regulatory requirements providing a necessary baseline, including segregated funds, registered clearing entities, and supervisory oversight.
The way a venue handles defaults under stress is a critical choice that varies even within regulated markets. A more valid concern is whether institutions actually want perpetuals, with some arguing that they are not a suitable replacement for regulated futures due to their variable funding and basis risk.
However, institutions are using perpetuals to hedge delta exposure, taking advantage of their liquidity, which is often deeper than that of dated futures. This liquidity edge is structural, driven by retail demand for perpetuals, and can provide a safe and durable pool of liquidity for hedging desks.
The debate over perpetuals is thus twofold, with the liquidity institutions want already existing, drawn in part by retail, and the key to safe usage being institutional-grade default management. The question is not whether perpetuals are dangerous but how a venue handles defaults under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is working towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse.
By containing defaults at their source, rather than transmitting them to the broader market, venues can break the chain of liquidation cascades and mitigate systemic risk.