Comment Text:
I am writing to submit my comments on the important market and regulatory risks associated with trading perpetual swap contracts.
Perpetual swaps are highly leveraged trading instruments, often allowing traders to take positions many times larger than their initial margin. While leverage can enhance returns, it also significantly amplifies potential losses. Even minor adverse price movements can lead to forced liquidations, particularly in volatile markets where price swings are common. In addition, perpetual swaps are subject to funding rate mechanisms that can fluctuate significantly, adding an unpredictable and sometimes costly dimension to holding a position over time. Unlike traditional futures, perpetual swaps do not expire or settle on a fixed date, so there is no guaranteed point at which gains and losses are realized. Traders can hold positions indefinitely, effectively avoiding settlement akin to failures-to-deliver in traditional securities.
Liquidity risk also exists, particularly during periods of market stress when spreads may widen, slippage may increase, and the ability to exit positions without incurring significant losses may be compromised. But most importantly, market manipulation and price anomalies are more likely in less mature or unregulated markets, potentially exposing traders to unfair pricing practices or flash crashes caused by large, sudden trades.
While perpetual swaps provide flexible and efficient exposure to asset price movements, they carry considerable risks that should not be underestimated. Market volatility, funding costs, and platform integrity are significant concerns, in addition to the potential implications of evolving global regulatory frameworks. Participants should ensure they have robust risk management practices before engaging in these derivatives, and regulators should enforce these limits.
Given the increasing scale, complexity, and global accessibility of perpetual swap markets, I recommend the CFTC consider the following actions:
• Implement standardized leverage limits and margin requirements for all participants.
• Require risk disclosures and suitability assessments akin to those applied in traditional
derivatives markets.
• Strengthen market surveillance and reporting obligations for exchanges and institutions participating in perpetual contracts.
• Promote cross-border regulatory coordination to reduce jurisdictional arbitrage and regulatory evasion.
I appreciate your attention to these emerging risks and fully support further efforts in fostering safe, transparent, and resilient derivatives markets.
