The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments will pose a threat to the stability of the market. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design.
The venue's choices, such as leverage limits, margin rules, and default management, are what determine the level of risk. The concern is not unfounded, as past deleveraging episodes in the crypto market have been caused by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. The key to preventing a systemic event is to design a venue that can contain the risk, rather than transmitting it.
This can be achieved through regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight. The real question is not whether perpetuals belong in regulated markets, but how a given venue is built to manage risk.
Institutions may not want perpetuals as a replacement for traditional futures, but they can be useful for hedging delta exposure. The liquidity of perpetuals is a major advantage, and institutional-grade default management can make them a safe and useful tool for institutions. The debate surrounding perpetuals is not about their inherent risk, but about how venues can be designed to manage that risk and provide a safe and stable market for institutions to operate in.