The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics arguing that these high-leverage instruments pose a threat to the stability of the financial system. However, this critique is misdirected, as the risk associated with perpetual futures is not inherent to the contracts themselves, but rather a result of the design of the venues on which they are traded. The true determinants of systemic risk in a derivatives market are factors such as leverage limits, margin rules, index construction, and default handling, all of which are choices made by the venue operators. The risk of a liquidation cascade, which can lead to a systemic event, is also a result of venue design, particularly the use of manipulable indices and auto-deleveraging mechanisms.
These features are not inherent to perpetual futures, but rather a result of how they are implemented. The real question, therefore, is not whether perpetuals belong in regulated markets, but rather how a given venue is designed and operated. Regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight, are necessary to establish a baseline level of safety, but the handling of defaults under stress is a separate choice that can vary even within regulated markets. A more valid concern is whether institutions actually want to use perpetuals, given their limitations as a substitute for regulated futures.
However, this concern is also misguided, as institutions are not looking to use perpetuals as a replacement for dated futures, but rather as a tool for hedging delta exposure. The liquidity of perpetuals, which is often derided by critics, is actually a key advantage, as it allows institutions to execute trades quickly and efficiently. The design of perpetuals, which draws in retail flow and concentrates liquidity, is a structural advantage that can provide a deep and durable pool of liquidity for institutions to use.
The key to safely using this liquidity is institutional-grade default management, which is the same factor that contains systemic risk. The question is not 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.
By containing defaults at their source, rather than transmitting them to the broader market, a venue can break the chain of risk that turns a blown-out account into a market-wide cascade. This is the difference between a venue that contains a failure and one that transmits it, and it is the key to making perpetuals a safe and useful tool for institutions.