The introduction of perpetual futures into regulated markets has sparked intense debate, with many warning of the potential for systemic risk due to high-leverage trading. However, this criticism is misplaced, as the true risk lies not in the perpetual futures contracts, but in the design of the trading venues. The real concern should be the choices made by these venues, including leverage limits, margin rules, and default handling.
The risk of systemic events is not inherent to perpetual futures, but rather a result of how these contracts are traded and managed. Recent deleveraging episodes in the crypto market have highlighted the importance of venue design, as forced liquidations and cascading losses can be triggered by poor risk management. The key to mitigating these risks is not to reject perpetual futures, but to ensure that trading venues are designed with robust risk management systems, including segregated funds, registered clearing entities, and effective default handling mechanisms.
Institutions may not need perpetual futures as a replacement for traditional futures, but they can still be a valuable tool for hedging and risk management, particularly when liquidity is a primary concern. By providing a deep and durable pool of liquidity, perpetual futures can be a valuable addition to regulated markets, but only if they are managed and traded responsibly. The question is not whether perpetual futures are dangerous, but how venues handle defaults and manage risk. With proper design and management, perpetual futures can become a safe and valuable tool for institutions, rather than a source of systemic risk.