First of two proposals ok'd by Trading Commission
WASHINGTON — The Commodity Futures Trading Commission Monday turned thumbs up on a petition by Media Derivatives Inc. for a license to trade contracts based on box office returns.
The five-member agency voted 3-2 to approve the petition, a blow to a coalition assembled by the Motion Picture Assn. of America to oppose the plans by Media Derivatives and the Canter Exchange. The agency is expected to vote separately on the Cantor filing before June 28, a decision also likely to be affirmative.
But whether the two exchanges will actually operate will be up to Congress. A provision currently before a House-Senate conference committee on financial reform legislation contains a provision that would bar B.O. futures trading.
The commission said it issued the order with specific modifications to guard against manipulation or any other abusive conduct in the trading of any contract by any informed sources within the studio or distribution company.
In a statement explaining its decision, the Commission said that it “found that the contracts are based on commodities, are not readily susceptible to manipulation and serve an economic hedging purpose.”
The MPAA argued just the opposite.
Commissioner Bart Chilton, who opposed the box office contracts, said in a conference call that “Congress never intended that we would do this type of thing.
“This is more like a gambling arcade than a serious hedging opportunity,” said Chilton. In a written dissent, he argued that the majority was taking too broad of a reading of the Commodity Exchange Act. He wrote, “We could approve terrorism contracts, contracts on whether a certain movie star will die or become disabled, or contracts on the likelihood of UFOs hitting the White House. Each of these events could have economic consequences, bit it is hardly appropriate under the Act to deem them consequences.”
The approval puts faith in Rentrak to gather the box office data, and the Commission noted that the service’s “reputation as a reliable source of revenue information are dependent on its ability to report accurate revenue figures to the distributors.”
Media Derivatives agreed to a number of conditions that are designed to address concerns over market manipulation.
Among them is a rule that will require “entities and individuals who control a film’s marketing budget, release date or opening screen number” — in other words, a studio and its top executives — “to provide the Exchange with information regarding such decisions whenever that entity or individual holds a position of 1,000 or more contracts.”
No employee of a distributor who is responsible for the gathering of box office data will be able to trade “any motion picture contract on any motion picture released by such distributor for any account.” Employees of companies that gather data, like Rentrak, also will be restricted from trading.
Studios and distributors also would have to agree to submit copies of “firewall’ procedures to the Trend Exchange before they are granted access to trade. Among the “firewall” criteria are a physical separation of groups within the company; separation of reporting lines for each group of at least one management level within the organization; and a periodic review of the policy.
The Trend Exchange also will be responsible for reviewing each application to trade to make sure that person is not on the restricted list.