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Understand how the contract can lose value
A perpetual future, or perp, is a leveraged derivative with no set date when it expires and settles. Its price can diverge from the spot price of the referenced asset. Periodic funding payments between long and short position holders are intended to encourage the perp price to track its spot reference, but they do not guarantee that the prices will match. Funding can be paid by longs or shorts depending on the rate and the product’s rules. The SFC framework and a 2026 SEC comment submission describe these mechanics and related risks.
Assess the position as a combination of market exposure, margin rules, funding, execution, collateral, and venue risk. An advertised maximum leverage ratio alone does not tell you how much you could lose or how the venue will handle a stressed market.
Check funding before estimating the cost of holding
Funding is a variable payment or receipt, not a fixed interest rate. Its economic effect depends on the rate, your position side, the payment schedule, the settlement asset, and how long you hold the position. A high rate by itself does not establish manipulation or a malfunction; it may reflect demand for leveraged exposure. But a persistent, economically large payment can materially change a position’s holding cost.
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- Find the formula, the data and calculation window it uses, any cap, and how often payments are made.
- Confirm which side pays when the rate is positive and when it is negative, and whether the payment is taken from or added to margin.
- Check the settlement asset and examine historical and projected rates, while treating projections as variable rather than guaranteed.
- Estimate how repeated payments would affect your margin and profit or loss over your intended holding period.
For platforms within its Hong Kong scope, the SFC framework calls for disclosure of funding inputs and settlement frequency and a funding settlement at least once every 24 hours. That cadence is not a universal rule for all venues. Read the SFC framework.
Map leverage, margin, and liquidation thresholds
Compare the position’s notional exposure with the collateral required to support it. Identify initial margin—the amount required to open or maintain the position under the venue’s rules—and maintenance margin, the minimum margin level that must be preserved to avoid liquidation. Check whether requirements change with position size, whether margin is isolated to one position or shared across positions, and what precise account or position threshold starts liquidation.
The SEC submission illustrates leverage with a $100 position backed by $10 of margin: that is 10-to-1 leverage. In a simplified calculation, a 10% adverse move against the $100 exposure corresponds to a $10 loss before fees and funding. Actual liquidation may occur earlier because of maintenance-margin rules, fees, funding, and venue procedures; the example is not a universal liquidation formula or a recommendation. The submission discusses how initial margin, maintenance margin, liquidation policy, market liquidity, and resources for liquidation shortfalls interact.
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Higher initial margin or earlier liquidation can reduce the chance that an account has a shortfall, but it can also make a position more vulnerable to liquidation after a temporary adverse move. Read the actual thresholds and position tiers rather than treating a leverage limit as a complete measure of risk.
Find out how liquidation is triggered and executed
A venue may use a mark price to calculate mark-to-market profit and loss and trigger liquidation; the latest traded price is not necessarily the decisive price. Check the mark-price definition, whether liquidation is partial or full, applicable liquidation fees, and the steps the venue takes to close a position.
- What happens if the order book cannot absorb the closing trade?
- Can losses continue to grow while a position is being closed in a fast market?
- Can the venue reduce or close positions through a mechanism that affects traders who have not defaulted?
- How are liquidation shortfalls handled, and what conditions govern any insurance or reserve fund?
Price gaps, limited liquidity, delays, and cascading liquidations can make execution worse than the trigger price. A fund’s existence does not establish that it will be sufficient or available in every scenario; check the venue’s current terms. The SFC framework identifies cascading liquidations, gaps, liquidity constraints, and difficulty closing positions as risks for platforms within its scope. See the SFC framework; the SEC submission discusses execution and liquidation shortfalls.
Inspect the index and mark-price methodology
The index is the reference price assembled from underlying markets; a venue may derive its mark price from that index and other inputs. Check which markets contribute, how often the index updates, how outliers or source outages are handled, and whether multiple independent sources are used. Also look for automatic failover if a price input is disrupted.
A perp can trade away from its reference price, especially in volatile conditions. As a result, valuation and liquidation may differ from what you would infer by looking only at the last traded price on one exchange. The SFC framework calls for transparent, objectively verifiable price methods and timely reference data for platforms it covers. The framework sets out its expectations for price references.
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Check which asset you post as collateral and which asset the contract uses for settlement. Contracts referencing the same cryptocurrency can have materially different risk properties if one is denominated or settled in a stablecoin and another in the underlying coin. Collateral can also lose value at the same time as the position, depending on the assets and market conditions.
- How is collateral held, and is it segregated?
- What do the venue’s terms say about custody and the treatment of assets if the venue becomes insolvent?
- What is the order of default management: order-book liquidation, backstop liquidity providers, insurance or reserve funds, auto-deleveraging, or another loss-sharing mechanism?
- Under what conditions can the venue reduce or close a non-defaulting trader’s position?
Look for the triggers and parameters for any insurance fund or auto-deleveraging (ADL) process, not just a headline fund balance. The SFC framework calls for relevant disclosures for platforms within its scope. See the SFC framework. The SEC submission likewise highlights the distinction between Tether-denominated and coin-denominated contracts. Read the submission.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Evaluate liquidity, fees, and operational resilience
Review order-book depth and likely slippage at the position size you are considering, along with trading fees, liquidation fees, and funding. A market that appears liquid in ordinary conditions may behave differently during a sharp move. Check what the venue says about outages or disruptions and how it handles trading, settlement, price inputs, and liquidation during extreme but plausible conditions.
There is no universal liquidity threshold or fee level that applies across perps; these are contract- and venue-specific. The SFC framework calls for stress testing and orderly trading, settlement, and liquidation under extreme but plausible conditions for platforms within its scope. Consult the framework and the venue’s current contract specifications.
Compare contracts using the same checklist
When assessing two venues or contracts referencing the same asset, compare the specifications side by side rather than relying on a single headline, such as maximum leverage.
| Comparison point | What to verify |
|---|---|
| Funding | Formula, inputs, cap, payment frequency, and settlement asset |
| Margin | Initial and maintenance requirements, size-based tiers, and isolated or shared margin rules |
| Valuation | Index sources, mark-price method, update frequency, and outage handling |
| Liquidation | Trigger, partial- or full-close process, fees, and treatment of shortfalls |
| Collateral and settlement | Accepted collateral, settlement asset, custody, segregation, and insolvency terms |
| Default management | Backstop liquidity, insurance or reserve funds, ADL, and other loss-sharing rules |
| Execution and operations | Depth at your intended size, slippage, and outage procedures |
| Jurisdiction and access | Eligibility requirements and the regulatory protections that apply to you |
Use the venue’s current specifications and terms for the actual values. A rule applying to one jurisdiction or platform category should not be assumed to apply everywhere.
Keep the regulatory scope clear
The SFC document is a high-level framework for virtual asset trading platforms licensed in Hong Kong, last updated 11 February 2026. It says perps within that framework should be offered only to professional investors, and it describes platform expectations in that Hong Kong context. Those requirements are not a universal eligibility rule for every jurisdiction or venue. Read the SFC framework.
The other cited source is a comment submission to the SEC by Ariel Zetlin-Jones, Bryan R. Routledge, and Nicolas Christin, not an SEC finding or adopted rule. It argues against treating perps as categorically harmful or beneficial and says high funding alone does not establish abuse. It also cites historical, sample-specific Sharpe ratios of 8.76 for a Bitcoin Tether-denominated short-perpetual/long-spot carry trade and 4.93 for a Bitcoin coin-denominated carry trade, drawn from a referenced paper. These are not expected returns, current market-wide statistics, or evidence that the strategies can be reproduced. Read the SEC submission.
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