Box office exchanges await decisions by feds
Hollywood’s mini-drama over the prospect of trading in weekend box office receipts appears to be headed for a climax — but the battle may say as much about each side’s lobbying prowess as it does the merits of the film futures exchanges.
By Monday, the Commodity Futures Trading Commission will decide whether to approve Media Derivatives Inc.’s plans for film futures trading, the first of two proposals tied to a movie’s returns. That vote likely will signal the fate of a second proposal for the Cantor Exchanges, which the commission will decide on separately by June 28.
But the spotlight then will shift to Capitol Hill, as a House and Senate conference committee is hoping to iron out the differences on financial reform legislation. The Senate’s version of the reform bill includes a provision that would ban the trading in box office receipts.
The relatively quick, three-month battle appears to favor the studios and their lobbyists, who are dead set against the idea of such “popcorn prediction markets,” as they have been dubbed.
However, executives with the exchanges believe that a commission vote in favor of their idea will be a powerful signal to House and Senate conferees to keep the ban out of the final legislation.
“What I find most disappointing is that in the absence of this potential ban by Congress, all of the different points of view can be brought together through the regulatory process and ironed out,” said Richard Jaycobs, president of the Cantor Exchange. “We know that some of the studios expressed an interest in investing, but any such conversation would get cut off by a ban.”
He and others argue that the markets for box office receipts are a new risk management tool that proponents claim is urgently needed by the cash-strapped film industry, particularly in the indie sector. It would allow parties with financial interests in the film production and revenue chain to hedge the risks of producing motion pictures. Because of worries over conflicts of interest and insider trading, studios contend that it’s unclear who would and would not be allowed to participate.
Up until mid-March, little attention had been paid to the exchanges. By the time that the commission looked ready to give its approval to the creation of Media Derivatives’ Trend Exchange, the regulatory proceedings had followed the standard course, including a round of public comments that had closed four months earlier. Not a single objection had been lodged to either the Cantor or Trend exchanges.
But on the evening of March 23, the commission received a letter from MPAA’s interim CEO Robert Pisano disclosing the org’s opposition. It said the proposed movie futures contracts “may be inherently vulnerable to price manipulation.” Rather than serving any commercial purpose, “movie futures will simply allow the public to bet on whether a movie will be successful at the box office,” the letter warned.
The issue had suddenly appeared on the MPAA’s radar screen and demanded immediate attention, according to Pisano. “We don’t routinely monitor matters before the CFTC and we simply weren’t tracking it,” he explained. Pisano called it “ironic” that the issue came to the MPAA’s attention only weeks after the departure of MPAA chairman Dan Glickman, the former Kansas congressman and Secretary of Agriculture who was steeped in the intricacies of commodities futures.
The letter was the opening salvo in a vigorous campaign by MPAA to halt both proceedings in their tracks. Pisano immediately formed a broad coalition of large and small producers, labor unions, distributors, exhibitors, and others to help voice its fears that the “synthetic derivatives” created by the proposed B.O. exchanges could seriously damage the industry.
The MPAA team also rushed to Capitol Hill just as the Senate Agriculture Committee was considering the sweeping Wall Street reform bill eagerly awaited by President Obama. Within days of meeting with committee chairman Blanche Lincoln (D-Ark.) and others, a provision was quietly inserted into the measure to bar futures trading based on B.O. receipts. Caught in the turbulence of the MPAA’s sudden campaign were two bewildered entrepreneurs, Media Derivatives CEO Robert Swagger and Cantor’s Jaycobs, both of whom had begun publicizing their plans in earnest in anticipation of approval. Their business plans had been bolstered by input from numerous film industry execs including some from within MPAA member companies.
Pisano concedes that “relatively non-senior executives within some member companies” had participated in discussions about B.O. futures. “But there is absolutely no dissent among senior leaders of the six studios and (the DGA) that this should not happen,” he said.
Jaycobs and Swagger were forced to amass their own cadre of supporters and press them into duty before a hastily arranged House hearing in April. “The notion that regulated futures contracts amount to legalized gambling is not only outdated, but parochial and baseless,” Swagger countered at the hearing.
Even though financial industry experts came to the defense of Jaycobs and Swagger — and the financial services sector has a notorious lobbying influence on Capitol Hill — it’s been a tough sell to lawmakers.
Pisano says he is also optimistic about favorable votes from the two forums. “We established very conclusively during our testimony that these synthetic derivatives don’t meet the statutory criteria of the Commodities Exchange Act,” he said. As for Congress, “it seems very clear that this issue has broad bipartisan support.”
Regardless of which side is victorious, bitterness over the costly lobbying fight is certain to linger.
Jaycobs said he finds Pisano’s rationale for the tardy CFTC filing to be disingenuous. He claims his company even kept Glickman in the loop, and that it has e-mails acknowledging receipt from the former MPAA topper. Swagger said his company has acted in good faith and carefully followed every procedure before the CFTC.
Asked if there is a specific film that he would find appropriate as a new release investment vehicle, Jaycobs wasted little time in replying. “It would be ‘Mr. Smith Goes to Washington.'” Swagger also has a ready answer: “Groundhog Day.”