What are perpetual futures.
The Commodity Futures Exchange Commission is seeking comments regarding the use of perpetual contracts in derivatives markets. Perpetual futures are derivative contracts without an expiration date.
A derivative is a financial contract whose value is dependent on an underlying asset. A derivative can be sold over-the-counter or on an exchange.
The lack of an expiration date (the date the contract is settled and either cash or the asset is delivered) allows traders to speculate indefinitely on the prices of the underlying assets.
In addition, the contract (delivery) price is kept aligned with the spot (same-day market) price through a mechanism called the funding rate. The funding rate is a periodic payment between those who are long (the buyers) the contract and those who are short (the sellers) the contract.
When the funding rate is positive (contract price greater than spot price), the buyer pays the seller the funding amount. When the funding rate is negative (contract price lesser than the spot price), the seller pays the buyer the amount of the funding rate.
Used prominently in the cryptocurrency markets, the CFTC would like to better understand the potential uses, benefits, and risks from the use perpetual futures in the derivatives markets.
Perpetual futures. The new derivatives frontier …
While the CFTC acknowledges the use of these derivatives for cryptocurrency, the CFTC implies that use of these derivatives as a speculative or hedging tool in financial markets is novel. Perpetual contracts have been around for decades, but questions have arisen in caselaw about whether perpetual contracts are favorable due to commercial interests not being “forever.” (See Victor R. Jespersen, Appellant v. Minnesota Mining and Manufacturing Company, Appellee, 700 N.E. 2d, 1014 (1998). Jespersen established in the state of Illinois that perpetual contracts were terminable at will, for the public policy reason that commercial interests are not expected to last forever.
But this rule applies only if the contract’s duration and manner in which it can be terminated are uncertain. (See Riverside Marketing, LLC v. Signaturecard, Inc., No. 02CIV0349, 2006) For a potentially perpetual contract not to be terminable at will, there needs to be an objective event that has the effect of making the contract sufficiently definite in duration. Also, where a clause extends a contract into perpetuity subject to only to one party’s unilateral right to terminate the contract, the contract is terminable at will.
These are just two examples of how the state and federal courts address perpetual contracts, and they may not provide enough insights when discussing the future delivery of a financial asset the price of which helps determine the value of its derivative contract. While the terms perpetual contract and perpetual futures appear to be used interchangeably, focusing on the delivery of a financial asset may be a point of divergence.
And what is the stated government interest in perpetual futures?
7 USC Section 5(a) defines the government’s rationale for regulating futures transactions on an exchange. In a nutshell, it is about maintaining an orderly environment for the speculation on price movements in the underlying commodities in futures contracts and the price of those contracts. Specifically, 7 USC Section 5(a) states:
“(a)Findings
The transactions subject to this chapter are entered into regularly in interstate and international commerce and are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.”
7 USC Section 5(b) goes on to describe mechanisms put in place by the CFTC to meet this government objective. These methods are deployed to prevent price manipulation and ensure financial integrity while avoiding systemic risks. There are also consumer protection objectives which include protecting market participants from fraud and other abusive sales practices and misuses of consumer assets.
And as for the trader’s interests …
Why enter a perpetual futures contract? Leverage, borrowing to take a larger position in a contract, is cited as one advantage to perpetual futures contracts. Flexibility is another advantage, due to no expiration date being set. Trading can be continuous because there are no expiration dates; therefore, perpetual futures can be used to hold longer-term positions.
Liquidity is also cited as an advantage of perpetual futures. Investopedia defines liquidity as the ability to quickly turn an asset into cash. It refers to the degree an asset can be quickly bought or sold in a market at a price that reflects its intrinsic value.
Compared to traditional futures, perpetual futures contracts are more liquid because of the absence of expiration dates.
To see the specific areas that the CFTC is seeking comment on, go to this link.
Alton Drew
4 May 2025
Disclaimer: This post is provided for informational purposes. Contact an investment or trading advisor before making a trade. For in-depth legal research and consultation on this topic, contact me at altondrew@altondrew.com.
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