Comment Text:
**Comment on CFTC Request for Comment: Trading and Clearing of Perpetual-Style Derivatives (May 21, 2025 Deadline)**
**Submitted by: Hans Thomas Meier**
**Date: May Fifth, 2025
Perpetual contracts, while increasingly popular in cryptocurrency markets, present structural risks that could significantly undermine the integrity of U.S. capital markets if introduced into regulated equities or derivatives venues without stringent safeguards.
**1. Structural Volatility and Disconnection from Fundamentals**
Perpetual derivatives lack a natural expiration date, allowing leveraged positions to persist indefinitely. This introduces chronic exposure to volatility without the temporal discipline found in traditional futures contracts. The CFTC’s April 21, 2025 Request for Comment (RFC) explicitly raises concerns about potential risks to market integrity and customer protection stemming from these characteristics[^1]. The agency’s accompanying press release also underscores the possibility of “new opportunities… as well as risks” in perpetual products[^2].
Studies show that perpetual futures now dominate cryptocurrency trading — accounting for over 90% of crypto derivatives volume[^3] — but their use has led to destabilizing volatility and price dislocations. The BIS, in Working Paper No. 1061, flags excessive leverage (up to 100×) as a primary contributor to destabilizing feedback loops and “strong de-leveraging cycles” in the crypto sector[^4]. Research from Cornell confirms these contracts increase price efficiency but also raise funding costs and volatility[^3].
**2. Regulatory Arbitrage and Unenforced Risk Controls**
Historically, platforms offering perpetuals have exploited jurisdictional gaps to avoid registration, AML/KYC, and retail protections. The CFTC’s own enforcement action against BitMEX, culminating in a $100M settlement, shows how offshore platforms allowed U.S. customers to access highly leveraged, unregulated perpetual contracts for years[^5]. Today, new proposals (e.g. Bitnomial’s “Botanical” platform) attempt to legitimize these instruments within U.S. regulation — but the same systemic risks persist[^6].
One early commenter to the RFC warns that the absence of expiry allows firms to indefinitely roll over risk, hiding losses and creating synthetic exposure with no meaningful accounting cycle — a structure prone to abuse and distortion[^7].
**3. Systemic Risk and Market Fragility**
Perpetual derivatives enable aggressive short-selling campaigns that can sustain artificial downward pressure on securities, impairing companies’ ability to raise capital and distorting price discovery. If used in equity markets, their continuous nature could amplify volatility during stress periods, a concern echoed in the MIT DCI's empirical research showing derivative-driven crash contagion[^8].
The March 12, 2020 “flash crash” in crypto markets exemplifies these dynamics. Within 15 minutes, Bitcoin plunged over 20% due to cascading liquidations in BitMEX’s perpetual swaps — an event only halted when the platform went offline[^9].
**4. Retail Harm and Inadequate Disclosures**
Perpetual contracts are complex, opaque, and structurally unsuitable for retail investors. The U.K.’s FCA banned crypto derivatives to retail entirely in 2021, citing excessive volatility, manipulation risk, and lack of fundamental valuation[^10]. U.S. platforms — whether operating offshore or preparing domestic launches — still promote these instruments to retail users with insufficient risk disclosure and no suitability standards[^11].
The CFTC rightly raises questions in its RFC regarding whether current disclosure regimes adequately explain the nature of funding rates, auto-deleveraging, and liquidation triggers[^1]. This lack of transparency places unsophisticated investors at disproportionate risk, as emphasized by public comment submissions[^7].
**5. Policy Recommendations**
In light of the documented instability, leverage risk, regulatory arbitrage, and retail exposure concerns, we urge the Commission to consider:
- Prohibiting the offering of perpetual contracts to retail investors on U.S.-regulated platforms;
- Requiring any onshore perpetual products to be subject to leverage limits no higher than 5×;
- Mandating disclosures equivalent to complex options and swaps, with added warnings for funding rates and liquidation risks;
- Ensuring any approval process includes a stress test framework evaluating potential systemic effects under extreme but plausible conditions.
**Footnotes**
[^1]: CFTC, *Request for Comment on the Trading and Clearing of “Perpetual” Style Derivatives*, April 21, 2025.
[^2]: CFTC Press Release No. 9069-25, *CFTC Staff Seek Public Comment on Perpetual Contracts*, Apr. 21, 2025.
[^3]: Ruan & Streltsov, “Perpetual Futures Contracts and Market Microstructure”, Cornell EMI Working Paper, 2025.
[^4]: BIS Working Paper No. 1061, “Deleveraging and Volatility in Crypto Markets”, Bank for International Settlements, July 2022.
[^5]: CFTC v. BitMEX, 2021 Consent Order and Settlement, U.S. District Court for the Southern District of New York.
[^6]: *Bitnomial Aims to Launch First U.S. Regulated Perpetual Futures Venue*, Markets Media, Nov. 14, 2024.
[^7]: Public Comment Letter, CFTC Perpetual Derivatives RFC, Apr. 30, 2025.
[^8]: MIT DCI Research, “Cross-Market Contagion and Liquidation Risk in Crypto Perpetuals”, 2020.
[^9]: *Crypto Market Flash Crash Analysis*, CoinDesk and BitMEX internal postmortem, March 2020.
[^10]: FCA Policy Statement PS20/10, *Prohibiting the sale of crypto-derivatives to retail consumers*, January 2021.
[^11]: Sidley Austin LLP, Client Memo on CFTC Perpetual Derivatives RFC, Apr. 29
