Comment Text:
Unlike traditional futures contracts—which have set expiration dates and require periodic rollovers—perpetual derivatives do not expire and settle continuously. This means that their value is updated in real time, using ongoing funding flows and margin adjustments to keep prices aligned with the underlying cash or spot markets. In traditional commodities trading, the expiration and subsequent rollover of contracts have long posed basis risk and operational challenges; perpetual derivatives eliminate these rollover issues but introduce new complexities that require robust risk management and regulatory oversight.
While this comment focuses on a regulated framework, it is important to note that decentralized exchanges—platforms built on distributed ledger, smart contract-based infrastructures—are emerging as a potential complementary model for perpetual derivatives. These decentralized platforms offer full on-chain transparency, automated risk management, and open access to market participants, aligning well with the overarching goals of market transparency and customer protection. But at this point, blockchain based systems require a tremendous amount of resources, energy expenditure, and computing. As a result, this approach ought to be left to address as a future possibility.
I would like to offer some thoughts on a few of the CFTC’s questions.
“What is an appropriate working definition of ‘perpetual derivative?’” (RFC Question 1)
A perpetual derivative is a financial instrument without a fixed expiration date that settles on a continuous, real-time basis. Its value is maintained through ongoing funding flows and margin adjustments that continuously align its price with the underlying cash or spot market. Many perpetual derivatives can be grouped into two categories: one that operates similarly to traditional futures contracts—with structured funding mechanisms and dynamic margin calls—and another that more closely resembles swaps in their continuous pricing behavior. This taxonomy is central to setting the appropriate margin requirements, clearing obligations, and overall regulatory treatment.
“Would Perpetual Derivatives have advantages for market participants over traditional futures contracts or spot market products? Would Perpetual Derivative products provide commercial risk management features that cannot be met with existing products?” (RFC Question 2)
Yes, perpetual derivatives offer distinct operational advantages. By eliminating the need for periodic rollovers, they reduce transaction costs and remove the basis risk that often accompanies the rollover process in traditional futures markets. However, lessons from the traditional commodities sector suggest that while rollovers involve their own set of costs and risks, the removal of a fixed expiration necessitates enhanced risk controls.
Without periodic expiration dates to serve as natural recalibration points, even minor pricing anomalies may accumulate over time, potentially amplifying systemic risks. This continuous exposure requires market participants and regulators to deploy sophisticated, real-time monitoring systems and dynamic margin frameworks that adjust instantly to evolving market conditions. In essence, the absence of a predefined endpoint shifts the entire burden of risk management toward continuous, automated oversight, ensuring that pricing remains reliable and that market transparency and integrity are steadfastly maintained.
“Would Perpetual Derivatives raise unique concerns about susceptibility to manipulation? Are there additional protections or safeguards that the Commission or exchanges should adopt to mitigate concerns about susceptibility to manipulation? Is there any additional guidance the Commission should adopt to clarify the regulatory treatment of Perpetual Derivatives? Would Perpetual Derivatives raise any novel concerns with regard to conflicts of interest?” (RFC
Question 6)
The continuous pricing model of perpetual derivatives creates inherent vulnerabilities to manipulation because there is no natural endpoint to force a periodic realignment in pricing. In a traditional futures contract, the expiration date acts as a natural checkpoint where positions are closed out and pricing discrepancies can be reconciled. With perpetual contracts, small deviations between the derivative’s price and the underlying asset's value might persist, and over time, these seemingly minor anomalies can be repeatedly exploited by sophisticated, high frequency trading algorithms. This absence of a defined settlement date means that any mispricing can compound without the regular corrective mechanism offered by an expiration event.
Furthermore, the ongoing nature of these instruments may give rise to conflicts of interest. In an environment where market participants serve as both liquidity providers and active traders, there is potential for these groups to influence funding flows and margin adjustments in a way that benefits their own positions, rather than ensuring a fair market for all participants. The incentive structures in a continuously settled market can lead to overlapping market roles, which in turn may undermine market integrity if not carefully managed.
Given these challenges, it is crucial for regulators and exchanges to implement additional protections and safeguards specifically tailored to this continuous trading model. Drawing on lessons from the commodity futures markets where robust, realtime surveillance has been key in preventing market abuse, it becomes imperative to deploy comprehensive monitoring systems that can detect and respond to anomalies as they occur. Automated systems capable of real-time data analytics are essential to flag any sustained patterns of discrepancy that could signal manipulation. In conjunction, regulatory guidelines that clearly define the procedures for margin and funding adjustments need to be established. Such guidelines would help ensure that these adjustments are applied consistently and transparently, reducing the room for potential manipulation.
“Do Perpetual Derivatives raise unique surveillance concerns for exchanges listing perpetual products?” (RFC Question 7)
Traditional trading environments are characterized by defined sessions that facilitate the detection of market anomalies within clearly delineated time windows. However, perpetual derivatives trade continuously without such discrete endpoints, removing some surveillance prerequisites, and rendering conventional surveillance methods less effective. In this setting, price distortions and irregularities can materialize at any moment, requiring exchanges to adopt sophisticated real-time monitoring systems. Drawing on experience from commodity futures markets, it is evident that robust, automated data analytics and anomaly detection are essential to rapidly identify and address potential market manipulation. Such systems must be capable of continuously processing complex market data and initiating prompt corrective measures, thereby preserving market integrity in a nonstop trading environment.
“The aims of derivatives markets include price discovery and risk mitigation. How do Perpetual Derivatives further risk mitigation? How do they further price discovery? Please provide likely use cases for Perpetual Derivatives.” (RFC Question 11)
Perpetual derivatives advance the twin objectives of price discovery and risk mitigation by providing a continuous, live stream of market information. Unlike traditional derivatives, which rely on periodic price convergence at expiration to reset positions, these instruments update their pricing in real time. This uninterrupted feedback enables market participants to adjust their positions immediately as market conditions evolve, meaning that the lag between exposure and hedging is markedly reduced. In traditional commodities trading, the discrete nature of expiration creates windows during which market shifts may occur without a corresponding adjustment in derivative pricing. Perpetual derivatives eliminate these gaps, ensuring that pricing remains aligned with the underlying asset at every moment.
“Futures markets can provide arbitrage opportunities between futures and cash markets, with convergence at expiration being a hallmark of a properly functioning market. What arbitrage could reasonably be expected between Perpetual Derivatives, traditional futures, and cash markets? What cash market convergence could reasonably be expected?” (RFC Question 12)
In traditional futures markets, arbitrage strategies largely depend on the predictable convergence of futures prices with the underlying cash prices as contracts approach expiration. That convergence acts as a natural calibrator: any divergence between the futures and spot prices is corrected at expiration, creating clear opportunities for profit. However, perpetual derivatives, by design, do not have this fixed expiration, so there is no predetermined event at which pricing is forced to align with the underlying asset.
As a result, the arbitrage dynamics of perpetual derivatives shift from a reliance on a single convergence event to continuous, real-time adjustments. Instead of waiting for the contract expiration to realize pricing alignments, arbitrageurs must instead monitor for and exploit incremental differences that occur due to variations in funding costs and ongoing pricing discrepancies among perpetual derivatives, traditional futures contracts (if they are traded concurrently), and the cash market. This continuous mechanism shares similarities with basis trades in commodity markets, where small, persistent mispricings can be exploited for profit.
The absence of a natural settlement date means that arbitrage opportunities in perpetual derivatives are inherently more transient and require active, relentless management. Advanced data analytics and real-time monitoring are essential, as even slight deviations can offer arbitrage opportunities that quickly vanish. Successful arbitrage in this continuous market environment thus demands not only rigorous technological tools but also the expertise to execute timely adjustments, ensuring that the pricing remains aligned and that any mispricings are captured promptly.
“Should Perpetual Derivatives be classified as swaps or futures contracts?” (RFC Question 13)
Perpetual derivatives blend features of both swaps and futures. Their continuous settlement and absence of a fixed expiration align them with swaps, while their daily mark-to-market and rigorous price tracking relate them to futures. This mixed nature complicates their categorization under existing CFTC regulatory frameworks, as each framework is built on distinct contract termination and price adjustment assumptions.
Experience in the commodities markets demonstrates that clear classification is vital for establishing consistent margin rules, clearing responsibilities, and oversight standards. Given the unique attributes of perpetual derivatives, a hybrid regulatory framework seems most appropriate. Specifically, the Commission should consider the following:
First, regulatory guidelines should draw from the established practices for both swaps and futures. For instance, rules governing margin requirements could combine the continuous risk assessment of swaps with the daily recalibration mechanisms of futures. Likewise, clearing processes could incorporate protocols from both regimes, ensuring that perpetual derivatives are subject to rigorous oversight even in the absence of a natural settlement date.
Second, developing a tailored framework that includes explicit definitions for funding cost adjustments, contingency measures, and systematic liquidation procedures is essential. This framework should mandate that exchanges and market participants implement robust data analytics and real-time monitoring to manage funding flows and mitigate market risks. Additionally, periodic reviews should be required to adapt these regulatory measures as market conditions evolve, ensuring that risk controls remain effective over time.
By adopting these specific recommendations, the CFTC can establish a more precise classification and a balanced regulatory framework that addresses the unique operational and risk management challenges posed by perpetual derivatives while protecting market integrity and investor interests.
Additional Considerations
Perpetual derivatives raise significant questions about investor protection and market transparency. Given their continuously updating nature and inherent complexity, it is vital that risk disclosures are precise and easily understood. Investors—particularly those not fully versed in the subtleties of high-frequency, 24/7 markets—must be apprised of the risks associated with rapid margin calls, volatile funding fluctuations, and potential operational delays. Lessons from traditional commodities markets illustrate that transparent disclosures are a cornerstone of market confidence; thus, regulators should mandate clear, detailed communication outlining the full spectrum of risks involved.
While many discussions focus on digital assets, perpetual derivative structures have the potential to extend into physical commodity markets, including agriculture, energy, and metals. These sectors present unique challenges in terms of price discovery, liquidity, and delivery logistics that differ fundamentally from digital or crypto markets. Historically, the transition between physical delivery and futures pricing has proven difficult to manage. Consequently, if perpetual derivatives were to be introduced in these sectors, tailored regulatory measures would be necessary to address additional issues such as custody arrangements, cross-border regulatory coordination, and reconciling continuous pricing with the physical delivery process.
The lack of an expiration date further complicates the resolution of customer defaults and insolvency events. In conventional futures, a defined termination date facilitates the orderly wind-down of positions during insolvency, allowing for a clear calculation of unwind values and an equitable allocation of losses. Without a natural endpoint, these processes become more complex and could lead to disputes during market stress. To mitigate these risks, regulators should consider establishing robust insolvency protocols that may include provisions like “virtual expiry” triggers, ensuring customer claims are managed fairly and efficiently.
Moreover, if a substantial share of trading activity transitions from standard futures to perpetual derivatives, there could be consequential effects on overall market liquidity and the balance of participant activity. Shifts in trading volumes have the potential to disrupt the pricing mechanisms in traditional markets, as established models may not smoothly integrate the continuous flow of perpetual trading. It is critical that both regulators and market participants monitor these dynamics carefully and adopt measures—such as liquidity safeguards and enhanced market oversight—to maintain stability across both new and legacy instruments.
Operational, Legal, and Economic Challenges
Perpetual derivatives not only introduce innovative product features but also present systemic challenges that mirror—and in many cases, intensify—those encountered in traditional commodity markets. Their real-time settlement and constant marking-to market
place heightened demands on technological infrastructure. Just as commodity exchanges have invested heavily in state-of-the-art surveillance and trading systems, exchanges handling perpetual derivatives must adopt advanced data analytics, automated monitoring tools, and real-time anomaly detection systems to swiftly identify and rectify unexpected volatility spikes or system failures, thereby averting potential liquidity crises.
From a legal perspective, the continuous nature of perpetual derivatives complicates unresolved matters such as insolvency resolution and default management. Traditional insolvency frameworks depend on clearly defined contract end dates, which enable orderly liquidation; without an expiration date, establishing unwind values becomes significantly more complex and may lead to prolonged disputes over customer entitlements. To mitigate these issues, regulators should introduce enhanced legal clarity through measures like periodic stress testing, along with tailored risk management protocols—such as virtual expiry triggers or mandatory forced liquidation thresholds—that can preemptively address insolvency scenarios. Furthermore, while perpetual derivatives are designed to improve market efficiency through continuous price discovery and dynamic hedging, they may also give rise to unintended economic distortions. In some cases, the pursuit of trading fees in a
nonstop market environment can incentivize high-frequency, fee-based transactions that detract from the instruments' core function of effective risk management. This shift, which prioritizes profit generation over genuine hedging, risks undermining the fundamental economic purpose of these markets—a lesson underscored by the speculative excesses witnessed in traditional commodity markets. Regulators, therefore, must ensure that these instruments retain their intended benefits by enforcing measures such as fee transparency, regular audits, and rigorous trading guidelines designed to curb excessive speculation.
In addition, the continuous and automated nature of perpetual derivatives introduces the potential for black swan events—rare, extreme disruptions that, while low in incidence, could have catastrophic effects. Without the natural reset provided by an expiration date, a sudden market shock, technical failure, or erroneous automated decision could trigger cascading margin calls and rapid liquidity shortfalls. These outcomes would be exacerbated by high-frequency trading algorithms and complex feedback loops inherent in real-time systems. To mitigate this risk, it is crucial that regulators and market participants implement rigorous stress testing, dynamic margin buffers, circuit breakers, and comprehensive scenario planning to ensure that any such extreme event can be effectively contained. I believe that adopting a pilot project or regulatory sandbox approach would allow both regulators and market participants to assess these derivatives in a controlled
environment before a market-wide rollout.
Conclusion
Perpetual derivatives represent a promising evolution for modern markets by eliminating the limitations of fixed-expiration contracts. Their continuous settlement, dynamic margin calls, and ongoing funding flows offer significant operational efficiencies and improved risk management through uninterrupted price discovery. However, this continuous structure also introduces regulatory, operational, and systemic challenges that demand careful oversight. Drawing on lessons from traditional commodities markets, regulators must first
establish a precise classification of perpetual derivatives. A clear taxonomy that differentiates instruments resembling swaps from those akin to futures is essential
for setting appropriate margin requirements, clearing obligations, and supervisory frameworks. Without such clarity, risk controls may be inconsistently enforced, undermining market integrity.
To address the unique risks of perpetual derivatives, specific measures should be implemented. Mechanisms like virtual expiry triggers or adaptive liquidation protocols can provide timely resolution during customer defaults or insolvency events. Additionally, exchanges must enhance their technological infrastructure with real-time surveillance, advanced analytics, and automated anomaly detection to promptly identify and resolve pricing discrepancies and system failures. Transparent risk disclosures detailing rapid margin calls, funding volatility, and operational delays are also critical. I recommend a pilot project approach to gather empirical insights and validate proposed measures in a controlled setting before full-scale adoption. Furthermore, it is recommended that the Commission consider testing these instruments on a pilot basis. That approach would provide valuable insights into the benefits and challenges of perpetual derivatives.
Thank you for considering my comments.
Michael Ravnitzky
Silver Spring, Maryland
