In traditional finance (TradFi) a perpetual swap is a financial derivative that functions similarly to futures contracts but with no expiration date. This unique characteristic means traders can hold perpetual positions indefinitely—hence the term "perpetual." These instruments are commonly used by traders in cryptocurrency markets (though they exist in traditional markets too). A perpetual swap may be like a future contract, but it shows many differences, which must be looked at. Unlike standard futures contracts that have a set expiration or settlement date (e.g., quarterly futures), perpetual swaps allow traders to maintain their position as long as they meet the margin requirements and pay applicable funding fees. Instead of expiring, perpetual swaps employ a funding rate system to periodically align the contract price with the spot price of the underlying asset. Funding fees are exchanged between long and short position holders. As a rule of thumb: if the perpetual price is higher than the spot price, longs pay shorts; if lower, shorts pay longs (more details are provided in chapter 3 of this publication). This mechanism ensures that the perpetual price tracks the underlying asset's spot price closely over time. Perpetual swaps usually offer high levels of leverage, allowing traders to open larger positions than their initial capital at the cost of increased risk. Liquidations are based on the "mark price" rather than the contract price to prevent anomalies in market behaviour (e.g., extreme wick movements causing unnecessary liquidations).

In that respect one must also differentiate between perpetual swaps and Contract-for-Difference (CFD). While both perpetual swaps and CFDs allow traders to speculate on the price of an asset without owning it, the two instruments differ significantly in structure, mechanism, and intended use. Perpetual swaps are designed with a funding rate mechanism to mimic futures contracts while retaining no expiration. A CFD is an agreement between the trader and the broker to settle the difference between the opening and closing prices of a position. Perpetual swaps are usually cash-settled, meaning no physical delivery of the underlying asset ever takes place. Settlement pricing of perpetual swaps is based on the spot price of the underlying asset, often using indices or time-weighted average prices (TWAP) as a reference. CFDs are similarly cash-settled; however, their pricing and payout may rely on a broker’s internal pricing or spreads. Unlike perpetual swaps, CFDs do not require mechanisms like a funding rate to maintain alignment with the spot price. The funding rate is a unique feature of perpetual swaps. It is an ongoing payment made between traders (longs and shorts, not the exchange) to ensure price convergence with the spot market. Traders pay or receive funding every 8 hours (or other intervals, depending on the platform). With respect to perpetuals, the exchange facilitates this transfer but does not take these fees itself—it's strictly a peer-to-peer mechanism. CFDs do not have a funding rate mechanism. Instead, brokers typically charge overnight financing fees (swap fees) if a position is held overnight. These fees are determined by the broker and are integral to their profit model, instead of being a market-driven mechanism. When it comes to liquidity for perpetuals it is generally provided by other market participants, including retail traders, institutional traders, and market makers. The trading occurs on order-book-style exchanges, which means bid/ask spreads are market-driven. CFDs rely on the broker as the counterparty. The broker often acts as the liquidity provider by matching client trades or taking the opposing side. This structure introduces "counterparty risk," where the broker's financial stability could affect traders.

Given this general description of perpetuals and their clear differences to CFDs, one may also need to clarify that perpetuals leveraged by crypto assets spot products do not fall under MiCAR but must be qualified in the same way as financial instruments in TradFi. As some market participants have expressed their concerns within the ESMA Final Report Guidelines on the conditions and criteria for the qualification of crypto assets as financial instruments (CARFI) - ESMA75453128700-1323 - about the settlement process for derivative contracts involving crypto assets. Some stakeholders pointed out that the traditional frameworks for settlement in cash might not fully apply when crypto assets are used, especially given the volatility and liquidity differences between crypto assets and fiat currencies. The suggestion was made for ESMA to consider the unique characteristics of crypto assets, such as their potential for instant settlement via blockchain technologies.

ESMA recognises the unique characteristics of certain crypto-native derivatives, such as perpetual futures. While these instruments may not have a direct equivalent in traditional finance, their economic functions can however be similar somehow to warrant classification as derivative contracts under MiFID II. ESMA clarifies in its CARFI publication that national competent authorities and financial market participants should also consider the unique nature of perpetual futures, which are derivative instruments that do not have an expiration or settlement date. Unlike traditional futures contracts, perpetual futures are designed to provide continuous exposure to the underlying asset without requiring periodic rollovers. Despite their unique structure, perpetual futures should be treated as derivative contracts as they involve an agreement between parties to exchange the performance of an underlying asset over time, and their value is derived from the price movements of that asset. National competent authorities (NCAs) and financial market participants should thus ensure that (tokenised) perpetual futures are assessed against the criteria set out in Annex I Section C, points (4)-(10) of the Markets in Financial Instruments Directive (MiFID II) acknowledging their growing significance in the crypto-asset markets.

Given these guidelines by ESMA and the above description of perpetuals, we consider a perpetual to qualify under Annex I Section C, point (10) of MiFID II: Options, futures, swaps, forward-rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Part, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, OTF, or an MTF.

As we understand the regulated perpetual market, there are no specific distribution and marketing rules when it comes to perpetual markets (yet). However, we understand that NCAs can intervene in services offered to its market participants in case of serious threat to the market. For Germany speaking (which may apply to other EU jurisdictions in a similar way), the German Retail Investor Protection Act (Kleinanlegerschutzgesetz) of 2015 gave the German Supervisory Authority (BaFin) the task of "collective consumer protection" and, among other things, granted it product intervention powers. With this tool, the marketing, distribution and sale of certain financial products can be restricted or even prohibited if these present a significant investor protection concern or a threat to the orderly functioning and integrity of the financial or commodity markets or to the stability of the whole or part of the financial system of at least one EU member state. BaFin can also use these powers if a derivative has detrimental effects on the price formation mechanism in the underlying markets. The powers also include the possibility of prohibiting or restricting a particular financial activity or practice. BaFin's intervention can take the form of a precautionary measure, for example a measure taken even before a product has been marketed, distributed or sold to the end client. The relevant legal basis is laid down in Article 42 of the Markets in Financial Instruments Regulation (MiFIR), which granted uniform powers of product invention both to national competent authorities and to ESMA and the EBA on 3 January 2018. At German national level, the scope defined under section 15 (1) sentence 2 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) also includes investment products and, for example, both independent agents and direct distributors. An almost identical wording governing powers of product intervention can also be found in articles 16 and 17 of the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs). National competent authorities and EIOPA can use these product intervention powers for packaged retail and insurance-based investment products. In order to assess, for example, at what stage a financial or insurance-based investment product raises significant investor protection concerns, BaFin uses the lists of criteria in Article 21 of Commission Delegated Regulation (EU) 2017/567 and Article 1 of Commission Delegated Regulation (EU) 2016/1904.

Both lists include a non-exhaustive series of criteria such as the complexity and transparency of the product, the type of clients to whom the product is marketed or sold, the risk-return ratio, pricing and selling practices, as well as issuer-specific criteria such as the issuer's financial and business situation.

However, product intervention measures are only considered if the specified risks cannot be dealt with using other tools under supervisory law.

One may notice different general administrative acts (product intervention), which BaFin published (similar product interventions are published by other NCAs):

• General Administrative Act pursuant to Article 42 of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR) regarding Futures under section 41 (3) and 4 of the German Administrative Procedure Act (VwVfG) in conjunction with Article 42(5) of MiFIR

• General Administrative Act pursuant to Article 42 of Regulation (EU) No 600/2014 (MIFIR) regarding binary options dated 1 July 2019

• General Administrative Act pursuant to Article 42 of Regulation (EU) No 600/2014 (MiFIR) regarding contracts for differences (CFDs) dated 23 July 2019

The three European Supervisory Authorities, ESMA, EBA and EIOPA (the ESAs), which have comparable powers of intervention, can only use these powers under certain circumstances and preconditions. One key precondition is that the national competent authority has not already taken sufficient measures to eliminate the risks.

Given this background, we suggest applying similar caveats as to the distribution of futures and CFDs in Germany (even though perpetuals are not considered CFDs, see above, we believe that a NCA would apply rules and regulations similar to those applying to CFDs). This means:

• investment firms contractually exclude an additional payment obligation for retail clients, and the loss of retail clients is therefore limited to the funds they deposit with the investment firm for futures/CFD trading, or

• before entering the transaction, retail clients confirm to the investment firm for each futures transaction that they are purchasing the future or the futures contracts solely for hedging purposes.