The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage retail trading. However, this critique is misdirected, as the risk is inherent to the venue's design, including leverage limits, margin rules, and default handling, rather than the perpetual contracts themselves.
The real issue is how a venue is constructed, with regulatory requirements providing a baseline for security, and the handling of defaults under stress being a critical factor. While some argue that institutions may not want perpetuals due to their limitations as a replacement for traditional futures, they can be useful for hedging delta exposure, and their liquidity is a significant advantage. The key to safely utilizing perpetuals is institutional-grade default management, which can contain systemic risk.
The debate should focus on how a venue handles defaults, rather than the contracts themselves, and regulated clearing has established a standard for managing risk. By meeting this standard, perpetuals can become a valuable infrastructure for institutions, and their design can be the key to mitigating systemic risk.