The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments could destabilize the market. However, this critique is misguided, as the risk is not inherent to the perpetual futures contract itself, but rather a result of the venue's design, including leverage limits, margin rules, and default handling. The real issue is not whether perpetuals belong in regulated markets, but how a given venue is constructed.
Regulatory requirements, such as segregated funds and a registered clearing entity, are essential to mitigate risk, but the way a venue handles defaults under stress is a separate consideration. In reality, institutions are not looking to replace traditional futures with perpetuals, but rather use them to hedge delta exposure, where liquidity is more important than term structure.
The liquidity edge of perpetuals is structural, drawn in by retail flow, and can be safely utilized by institutions with proper default management. The question is not whether perpetuals are dangerous, but how a venue handles defaults under stress. Regulated clearing has established a standard for containing systemic risk, and it is this standard that Bullish is building towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse.