B.O. trading gets another round with regulators
The idea of film futures trading could be a moot point if financial reform legislation passes, but federal regulators considering two proposals held a public hearing on Wednesday in which they listened to a contradictory mix of stern warnings and bright promise on just what the proposed box office trading would mean.
As they have before, some of the commissioners on the Commodity Futures Trading Commission, the government body that will oversee two exchanges that plan to trade contracts based on box office returns, expressed concerns about their viability. Commissioner Bart Chilton, among those with doubts, even coined a new term for them: “Popcorn prediction markets.”
Last month, the regulators approved the formation of the Trend Exchange, from Media Derivatives Inc., as well as the Cantor Exchange, but left open the question of whether the could actually trade in movie contracts. The first of the proposals, from Trend Exchange, must be accepted or rejected by the commission by June 7.
Although at least three members of the five person commission have expressed reservations about the idea, it’s still unclear how they ultimately will decide and, if they turn down the proposal, under what legal rationale they would do so.
Although the Senate is currently wrangling with financial reform legislation, the version currently on the flkoor still contains a provision that would ban trading on the basis of box office receipts.
At the commission’s hearing, chairman Gary Gensler asked repeatedly whether B.O. receipts fell under the definition of a commodity and suggested that the commission’s brain trust would conclude that it does. But whether they decide that there’s a potential for manipulation is still to be determined, he said.
Gensler also noted that the commission is mandated to approve these contracts unless it finds they violate the Commodity Exchange Act. But he also said he believes there is a fundamental difference between trading futures on individual films and doing so on crops of corn or vast quantities of oil.
His views were generally echoed by other commissioners who peppered witnesses with questions about issues including the potential for abuse of the proposed market. “How are we to ensure that barriers to insider trading are enforced?” asked commissioner Michael Dunn. Chilton questioned whether there was an “underlying commodity,” and again raised concerns about market manipulation.
Yet the commission’s director of market oversight, Rick Shilts, noted the important role played by media measurement and research company Rentrak Corp., based in Portland, Ore., as a reliable third-party data aggregator with no direct interest in any individual film. Supported by B.O. data supplied by distributors, there appears to be mechanisms in place so that the regulators can have confidence in the accuracy of the B.O. numbers, he said.
In a sense, much of the hearing resembled that before House and Senate subcommittees last month.
Once again testifying was Bob Pisano, interim CEO of the Motion Picture Assn. of America, who brought his high-wattage lobbying machine to the crowded hearing room to debunk the proposed exchanges, joined in opposition by IA and DGA representative Scott Harbinson. Pisano echoed what he has said before: That the proposed trading would merely be gambling vehicles that would harm the industry.
Cantor Exchange topper Richard Jaycobs and Trend Exchange chief Robert Swagger repeated their respective pitches that the sudden fears of detractors against B.O. futures trading are entirely unfounded. “MPAA’s complaints are not supported by any facts,” said Jaycobs.
Also bullish on the idea was financial expert Clark Hallren, managing director of Clear Scope Partners, who reviewed the current distressed environment of film financing. He said a hedging product would provide investors with a valuable method to manage risk while encouraging additional investment opportunities. One of the big benefits would be to help indies raise money, as the sector has taken a drubbing in the economic downturn and the pullback in available credit.
MPAA’s Pisano was quick to disagree. “It’s telling that the coalition that represents 90 percent of producers in this country opposes this idea,” he said. “There is a whole host of reasons that this synthetic product won’t help them raise capital.” He said one of the reasons for the decline in financial institutions investing in films is the damage done by wild and speculative investments. “We don’t want to bring that ethos into our industry. This is a product in search of a solution that doesn’t exist.”
Other industry participants included Alice Neuhauser, a principal with Complete Rights Management; Lionsgate vice chairman Michael Burns, who co-founded Hollywood Stock Exchange and later sold it to Cantor; and attorney/professor/consultant Schuyler Moore. Moore repeated assertions made during Congressional hearings that the studios would quickly rally around B.O. futures trading because it would bring billions of dollars of financing into the industry.
Moore said the studios are “shorting their films every time they do a slate financing transaction.” Indeed, he said, “the studios shorted $14 billion of production risk during the last 10 years. They must and will do it.” He said “what’s driving their paranoia is concern that if a film tracks badly on the exchange, theaters won’t book it and the public won’t go.” He called it a totally baseless idea.
Gensler invited interested parties to submit additional comments on the B.O. futures proposals by May 26.