The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments could destabilize 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 key factors that determine systemic risk in a derivatives market include leverage caps, margin requirements, funding design, and default management.
None of these factors are inherent to perpetual futures, which are simply a type of contract with no expiration date. The real concern is not the contract, but how the venue is designed to handle potential risks. The risk of a liquidation cascade, which can turn a sell-off into a systemic event, is a result of venue choices, such as the use of a manipulable index that can lead to forced liquidations at false prices, and auto-deleveraging that can exacerbate the problem. These issues are not unique to perpetual futures, but rather a result of poor venue design.
The question is not whether perpetuals belong in regulated markets, but how a given venue is built to mitigate these risks. Regulatory requirements, such as segregated funds, a registered clearing entity, and oversight, are necessary to establish a baseline level of safety.
However, how a venue handles a default under stress is a separate choice that can vary even within regulated markets. A more nuanced objection to perpetuals is that institutions may not want to use them, as they are seen as speculative and not a replacement for regulated futures.
However, this perspective overlooks the fact that institutions are using perpetuals to hedge delta, not as a substitute for dated futures, but because they offer the liquidity that institutions need. The liquidity edge of perpetuals is structural, drawn in by retail flow, and this is the overlooked prize in bringing perpetuals onshore. The two halves of the debate are one: the liquidity that institutions want already exists, drawn in large part by retail, and what lets them use it safely is institutional-grade default management.
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 a standard for decades, which is also the standard that Bullish is building towards. By containing the risk of default at its source, rather than transmitting it to the broader market, perpetuals can become a safe and useful tool for institutions. The design of the venue is what matters, not the contract itself.