The introduction of perpetual futures into regulated markets has sparked concerns about the potential for systemic risk, but this criticism is misplaced. The actual risk lies not in the perpetual futures contract itself, but in the design of the trading venue, including factors such as leverage limits, margin rules, and default management.
The risk of systemic events is more closely tied to the way a venue handles liquidations and defaults, rather than the contract type. In the context of cryptocurrency markets, past episodes of deleveraging have been triggered by a range of factors, including macroeconomic shocks, stablecoin de-pegging, and exchange outages, but the key factor that turns a sell-off into a systemic event is the liquidation cascade, which can be mitigated by proper venue design. The real question is not whether perpetual futures belong in regulated markets, but how a given venue is built to handle risk. Regulatory requirements are essential for ensuring a baseline level of security, but the way a venue handles defaults and liquidations is a separate choice that can vary even within the regulated perimeter.
A more valid concern is whether institutions actually want to use perpetual futures, given their limitations as a replacement for traditional futures contracts. However, many institutions use perpetual futures as a tool for hedging delta exposure, taking advantage of their liquidity, rather than as a substitute for dated futures.
The liquidity edge of perpetual futures is structural, drawn in by retail traders, and can be a valuable asset for institutions if managed properly. The key to safe and effective use of perpetual futures is institutional-grade default management, which can contain systemic risk. The debate over perpetual futures should focus on how venues handle defaults and liquidations, rather than the contract type itself. By prioritizing proper venue design and risk management, perpetual futures can become a valuable tool for institutions, rather than a source of systemic risk.