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 financial system. 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 real issue lies in the choices made by the venue, such as leverage caps, margin rules, and default management. The risk of systemic events is not caused by the perpetual futures contract, but by the transmission mechanism of risk, which is often the result of forced liquidations and the resulting cascade effect.
This can be mitigated by proper venue design, including the use of a registered clearing entity, segregated funds, and a supervisor's oversight. The real question is not whether perpetuals belong in regulated markets, but how a given venue is built to handle stress and default. Regulatory requirements are necessary to secure the baseline, but the handling of defaults under stress is a separate choice that varies even within the regulated perimeter. A more valid concern is that institutions may not want perpetuals at all, treating them as speculative rather than a replacement for regulated futures.
However, this is not how institutions use perpetuals, as they are often used to hedge delta, taking advantage of the liquidity they provide. The liquidity edge of perpetuals is structural, drawn in by retail flow, and is the overlooked prize in bringing perpetuals onshore.
The question was never whether perpetuals are dangerous, but how a venue handles a default when the market is under stress. Regulated clearing has established the standard for decades, and it is the standard that Bullish is building toward. By containing the systemic risk through proper venue design and default management, perpetuals can become a safe and useful tool for institutions.