Comment Text:
We appreciate the Commission providing us the opportunity to comment on the benefits, risks, and structure of Perpetual Derivatives. To us, a Perpetual Derivative has no expiry/settlement and relies on funding payments to converge on the underlying spot market price over time. From a taxonomy standpoint, Perpetual Derivatives can be characterized by their reference index, funding frequency, margin system and margin collateral.
We believe Perpetual Derivatives have several advantages for market participants over alternatives and that the availability of the Perpetual Derivatives in other markets disadvantages US traders and markets. Compared to traditional futures, Perpetual Derivatives reduce overhead for exchanges and costs for investors by getting rid of the need to roll and support new dated futures contracts. Perpetual Derivatives also shield retail market participants from volatility associated with expiry dynamics of physically delivered commodities that they may not want exposure to. Retail users of Perpetual Derivatives typically do not wish to take delivery or deliver physical commodities, nor are they hedging another financial position that requires them to face expiry volatility. These products will allow retail market participants to eliminate roll shocks that add variance when speculating on asset direction due to the absence of expiry risk.
That said, there are a few unique risks worth highlighting. For one, the open interest can rise to levels far greater than in single calendar-month futures because there’s no expiry and greater concentration of positions. However, on-chain venues such as Hyperliquid already hard-code safeguards against runaway open interest: dynamic open-interest caps that shrink as order-book depth thins, and a partial-liquidation engine. These controls disperse concentrated risk before it can snowball and keep market impact well below hard-cap levels. Perpetual Derivatives funding payments, margin, and PnL all rely heavily on the integrity of their reference indices and any manipulation there could trigger incorrect funding payments or liquidations. Where a multi-venue, time-weighted median oracle is in place, manipulation thresholds can be orders of magnitude lower. If the Perpetual Derivative market grows much larger than the spot market or the dated futures market, as is currently true in many crypto assets, it can produce funding-rate dynamics that create unnecessary and unforeseen volatility for market participants, especially when the margin framework doesn’t accept spot assets or dated futures as offsets. To mitigate this, we recommend the commission and exchanges (i) allow cross-margin with haircuts in underlying spot assets as well as dated futures and (ii) institute sensible position limits as the market grows. We do not believe that Perpetual Derivatives increase customer default risk that may expose other customers to potential losses in the event of an FCM insolvency resulting from the customer default.
To accommodate Perpetual Derivatives, we believe FCM risk disclosures to market participants can be improved with the addition of detailed risks associated with funding payments or “financing adjustments” as well as transparency associated with how these are calculated and the timing of the calculation.
In the context of energy and physical commodities, provided that these Perpetual Derivatives would have a funding rate relative to a dated future in a physical market, there is a unique risk with the timing of the roll of the dated future and subsequent adjustment of the funding rate. To mitigate this risk, the dated future that drives the funding rate needs to roll to the next dated future ahead of the expiration of the dated future to prevent investors from funding rate volatility on expiration. There are limited liquid spot indices for physical commodity markets which are primarily driven by dated futures, posing an issue on how to calculate the funding rate if one is only using the dated future and the perpetual future. This issue is mitigated in markets such as gold, which have a robust spot market, however for markets in natural gas futures, crude oil futures, and other commodity futures, it remains more difficult to create a robust reference index that avoids the dated futures as part of the calculation of the reference index. We believe that this can be addressed by weighing the calendar futures prices by share of open interest to create a representative index for the Perpetual Derivative.
Safeguards around susceptibility of manipulation that the commission and exchanges could adopt include position limits, surveillance sharing of the spot markets to make sure market participants are not manipulating the underlying spot market, and Commitment of Traders reports on the perpetual futures, ideally in real-time. Spot reference indices should be calculated from sources that have surveillance sharing with the exchanges and regulators to ensure market integrity in spot assets and indices.
While some have concerns around Perpetual Derivative markets fragmenting liquidity from dated futures contracts, we only see this risk materializing if adequate margin systems are not robust enough to support effective arbitrage across spot, futures, and perpetuals. Nonetheless, we believe Perpetual Derivative markets will ultimately centralize liquidity for people participating in speculation and statistical arbitrage of the product, which in turn will accommodate a larger user base of market participants. We believe that the centralizing force of perpetual futures should help in improving price discovery and liquidity of major commodities as it has in the crypto-asset market.
Perpetual Derivatives will likely attract largely the same array of market participants as traditional futures with potentially a greater emphasis towards speculators and arbitrageurs. As we have seen in crypto markets, Perpetual Derivatives are gaining popularity with speculators as they are easy to understand, while also attracting institutional investors and CTAs looking for broader exposure to commodity markets.
Some traditional futures market participants, namely real end users in commodity products and/or options traders, will be less likely to participate in Perpetual Derivatives markets because they need to hedge their duration and term to maturity risks with underlying products. For example, an options market maker will prefer to hedge their options expiring in 3 months with a 3 month future rather than hedge with a perpetual future that has unpredictable funding risk over the term of the trade. Similarly, a producer of copper will prefer to hedge their production over the next 3 months using futures contracts rather than a perpetual that can have unpredictable funding rates.
Perpetual Derivatives will become another core piece to the futures and cash markets provided that they are linked to both. Arbitrageurs will utilize the existing markets to triangulate a perpetual price that will be of easier use for a large cohort of market participants.
A Perpetual Derivative retains the mark-to-market and margining features of a traditional futures contract, but it rolls forward indefinitely instead of settling on a fixed expiry date. The price of the contract will represent the price of the underlying commodity for the time between now and the next funding payment. Perpetual Derivatives should be classified as futures contracts because they are constantly marked-to-market and the funding rate is not a true “swap leg” because no principal changes hands and funding payments net to zero across participants. At a minimum, Perpetual Derivatives should be regulated under a principles-based regime that recognises their hybrid nature. Furthermore, previous investigation by the CME spot-quoted futures will serve as a good example of a functioning Perpetual Derivative market.
While not explicitly mentioned in the RFC, we think it is also prudent to discuss Perpetual Derivatives in the context of decentralized finance and the additional advantages that onchain implementation can provide, namely real-time funding payment and real-time transparency. Real-time funding payments allow capital to be streamed into positions or withdrawn almost immediately instead of sitting idle until the traditional end-of-day clearing cycle, meaning margin is used more efficiently and hedges track spot more closely. This will lead to greater capital efficiency in the derivatives markets.
Real-time transparency places every trade, collateral transfer, and liquidation on a public ledger that all market participants can inspect at the same cadence, greatly reducing the informational asymmetries that contribute to hidden inventory, undisclosed insolvency, wash trading, and crowding of positions.
These same strengths already operate at scale on public-ledger venues that clear both spot and perpetual contracts onchain. A multi-venue reference price updates every few seconds and sets the funding rate. The mark price, which reflects the orderbook weighted mid-price, refreshes just as frequently, adjusting instantly when the venue’s order book moves, and it determines unrealised PnL, margin requirements, liquidation thresholds, and insurance-fund transfers. State changes finalize onchain in well under a second, giving both market participants and observers a continuous, tamper-evident view of positions, collateral balances, and the entire default waterfall. This deterministic, sub-second clearing cycle delivers a level of transparency and provable solvency that traditional, batch-processed FCM workflows cannot match. This transparency leads to less unknown risks in the markets which typically lies within the walled garden of a FCM or clearing agent.
We acknowledge that full ledger visibility can spark “crowded-position” headlines like the meme-stock and LME nickel episodes, where aggressive price runs hurt both market stability and the exchanges involved. Large basis desks and hedge funds supply much of the depth and cheap leverage retail traders enjoy, yet they will pull back if their exact hedge ratios can be tracked and distributed in real time.
An onchain trading venue can keep these institutions engaged and markets orderly without sacrificing its deterministic risk engine. Wallet addresses are pseudonymous and firms already split their positions and flow across many wallets programatically.The stronger safeguard is structural: margin is re-scanned in sub-second cycles against a robust mark price, and partial liquidations plus an insurance fund can absorb stress before bad risk can snowball. Desks that still need commercial privacy can route their flow through an omnibus FCM clearing account where a single onchain wallet faces the clearing layer while client sub-accounts remain off-ledger, so no individual market participant’s liquidation band appears onchain. Furthermore, regulatory agencies having the full collection of wallets of FCMs can gain risk insight into the state of portfolios at the clearing level without having to rely on self reporting, leading to more proactive measures against members who can cause systemic risk to the markets.
During 2020 and other years of heightened volatility, we saw large leveraged trading firms go under due to highly levered positions in basis and correlation trades. At some points these positions caused systemic risks to our financial system, prompting regulators, the Treasury, and the Federal Reserve, to step in to rescue the markets. Greater clarity via an onchain ledger can identify these risks in real time leading to better preparedness and a more proactive response rather than trying to parse information post blow-ups to address weaknesses in markets and positioning and rely on centralized businesses to liquidate positions held by high-value clients they still consider more profitable to retain than to remove the systemic risk.
The venue can also enforce price-band limits and automatic trading pauses, mirroring the velocity logic on CME futures. If the mark drifts outside a preset range around the composite index, a circuit breaker halts matching until prices realign. Taken together, these measures keep liquidity providers active, deter stop-hunting campaigns, and preserve the transparent, provably solvent clearing cycle that benefits the broader market.
