The systemic-risk debate over perpetual futures is aimed at the wrong target

The article discusses the debate around perpetual futures and their perceived systemic risk as these contracts enter regulated markets. Critics argue that retail-driven, high-leverage perpetual futures pose a systemic threat, but the author contends that systemic risk is not inherent in the perpetual contracts themselves, which are no-expiry derivatives. Instead, risk arises from how the trading venue is structured, including leverage limits, margin requirements, funding mechanisms, and default management practices. These venue-level choices, rather than the contract design, determine whether market stress leads to wide-reaching problems.

The article points to past crypto market deleveraging events, such as the cascade in October 2025, as examples of episodes amplified by risky venue practices like poorly designed indexes and auto-deleveraging that retroactively penalize profitable traders. Such mechanisms trigger vicious liquidation cascades, where forced sales depress prices, spreading distress across venues. Crucially, these failure modes are not contract features but venue designs, implying that appropriate regulation and infrastructure can contain systemic risk even with perpetual futures.

The author also notes that institutional players have limited interest in perpetuals as substitutes for traditional, term-structured futures because of variable funding costs and lack of delivery options. However, institutions do use perpetual futures for delta hedging because these instruments have the deepest liquidity pools, largely fueled by retail trading. The continuous tradability and no-expiry nature of perpetuals concentrate liquidity, providing an execution advantage for real-time risk management, which is a key incentive for institutions to trade them.

Finally, the article emphasizes that the fundamental question is how venues manage default risks under stress. A regulated clearing model, including segregated funds, pre-funded guaranty funds, default auctions, and a hierarchy of loss absorption, breaks the contagion chain that spreading liquidations can cause. This institutional-grade risk management, the author argues, transforms perpetual futures into safe infrastructure for market participants. The ongoing effort by exchanges such as Bullish to become regulated contract markets and clearinghouses aims to meet these standards and mitigate the systemic risks critics associate with perpetual futures.

The piece concludes by framing perpetual futures as part of a larger system where the market structure and regulatory safeguards, rather than the contracts themselves, determine the presence or absence of systemic risk. It calls on the industry and regulators to focus on venue design and default management to allow perpetual futures to function safely within regulated markets.