As perpetual futures enter the realm of regulated markets, concerns have been raised that these high-leverage, retail-driven instruments will introduce systemic risk. However, this criticism is misdirected.
The true source of systemic risk in derivatives markets lies not in the contract, but in the design of the trading venue. Factors such as leverage limits, margin rules, index construction, and default handling all contribute to the level of risk. The inherent characteristics of a no-expiry contract do not pose an inherent risk. The concern about systemic risk is not unfounded, as past deleveraging episodes in the crypto market have been triggered by various factors, including macro shocks, stablecoin de-pegs, and exchange outages.
The risk transmission mechanism, often in the form of a liquidation cascade, can turn a sell-off into a systemic event. Venue choices, such as a manipulable index and auto-deleveraging, can exacerbate this cascade.
The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is designed. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential for establishing a baseline level of security. How a venue handles defaults under stress is a separate consideration, and it can vary even within regulated markets.
A more valid concern is that institutions may not have an appetite for perpetual futures. A recent JPMorgan note found that institutions view perpetuals as speculative and not a replacement for regulated futures due to their lack of term structure and basis risk. This is correct from a mechanical standpoint, as perpetuals fall short as a substitute for dated futures. However, institutions are not using perpetuals as a replacement for dated futures, but rather as a tool for hedging delta.
Many institutions trading options on the Bullish Exchange use perpetuals to hedge their directional exposure, not as a substitute for dated futures, but because they offer the necessary liquidity. The term structure is less relevant for delta hedging than liquidity, and perpetuals provide the deepest and most continuously tradable delta-one instruments available.
The liquidity edge of perpetuals is structural, drawn in by retail investors who are attracted to their continuous tradability and lack of expiry. This concentrated liquidity is the overlooked prize in bringing perpetuals onshore. The two halves of the debate are interconnected: the liquidity that institutions desire already exists, largely due to retail flow, and what allows them to use it safely is institutional-grade default management. 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 working towards. When a liquidation shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging. In contrast, the clearing model starts with the defaulter, whose own margin and fund contribution absorb the first loss. The position is then worked off through the order book or auctioned to other clearing members, with a pre-funded guaranty fund providing an additional layer of protection.
This approach breaks the chain that turns a single default into a market-wide cascade, containing the risk at its source rather than transmitting it. By meeting this standard, perpetuals can become a viable infrastructure for institutions to use.