The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage retail trading. However, the risk is not inherent to the contract, but rather a result of the venue's design. The real concern is how the venue handles defaults, liquidations, and risk transmission.
The critique of perpetual futures is misplaced, and the focus should be on the venue's architecture, including leverage caps, margin requirements, and funding design. The risk of a liquidation cascade, which can lead to a systemic event, is more related to the venue's choices than the contract itself. Regulatory requirements, such as segregated funds, registered clearing entities, and oversight, are essential to mitigate this risk.
The debate around perpetual futures should shift from their perceived dangers to the importance of venue design and default management. Institutions are not looking to replace traditional futures with perpetuals, but rather to utilize them for delta hedging, where liquidity is key.
The liquidity edge of perpetuals is structural, driven by retail demand, and can be safely accessed by institutions with proper 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. By containing defaults at their source, rather than transmitting them to the market, the risk of a systemic event can be mitigated.
The design of the venue is the key to making perpetuals a safe and useful tool for institutions.