Opening bid on film futures

Biz hopes for D.C. kibosh on box office trading

Federal regulators on Monday approved a plan for trading of box office futures. But its prospects remain uncertain as the battle shifts to Capitol Hill, where studios are seeking to ban the trading as part of financial reform legislation.

Another proposal for box office futures trading, from the Cantor Exchange, will come before the commission on June 28, and the body is expected to approve it as well.

The ban on box office trading was placed in the Senate version of the financial reform legislation after vigorous lobbying by the MPAA and other industry groups. That bill must be combined with the House version of financial reform, which does not contain the ban on trading. President Obama is hoping to sign the legislation by July 4.

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.”

Studio lobbyists had argued the opposite.

Commissioner Bart Chilton, who opposed the box office contracts, shares that view and said in a conference call, “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 that “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, but it is hardly appropriate under the Act to deem them consequences.”

The Trend Exchange will rely on data from Rentrak, and the commission gave the box office data service its blessing. It cited the company’s ability to independently gather box office data and noted that it has a “reputation as a reliable source of revenue information.”

To win approval, Media Derivatives agreed to a number of conditions that are designed to address concerns about market manipulation. The intent, the commission stated, is to ensure that “knowledgeable parties” cannot intentionally release or misreport data that would have an impact on the trading or settlement of the B.O. contracts.

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.”

In addition, 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 firewall policy.

The Trend Exchange also will be responsible for reviewing each application to trade to make sure the applicant is not on a list of those restricted from trading.

Operators of Media Derivatives Inc., which plans to begin trading on its Trend Exchange later this year with a set of films including Sony’s release of “Takers,” are hoping the greenlight from the Commodity Futures Trading Commission will help convince lawmakers. The commission approved the plan on a 3-2 vote.

In a conference call with reporters, Media Derivatives CEO Robert Swagger conceded that his company faces an uphill battle in Congress against “the powerful MPAA lobby,” but said he was delighted that the commission’s staff and a majority of its members “recognized the legitimate economic risk management benefits that the products will provide to the entertainment industry.”

“At the same time, we regret that a special interest group of Hollywood industry insiders chose to politicize the issue,” he said. “We will fight all attempts to overturn this decision in Congress.” He said he would announce details of that effort later this week during a Washington, D.C. press conference.

Swagger called the proposed ban on box office futures in the Senate-passed legislation pending before a conference committee “the best handout that members of Congress have given to Hollywood in years.” He said it represents “pure special interest politics,” with 54 words that don’t belong in the 1,974-page financial reform bill. He also said the attempts by the Motion Picture Assn. of America and a coalition of opponents to short-circuit an open regulatory process is a cautionary tale for any entrepreneur who runs afoul of special interests on Capitol Hill.

In a response to the commission’s decision, the MPAA again argued that the box office futures trading will amount to gambling. It criticized the agency’s decision to “permit wagering on motion picture box office numbers,” and described the futures plans as “no more than over-under bets on a movie’s performance.”

Interim CEO Bob Pisano repeated assertions that the Media Derivatives and Cantor proposals serve no public interest, and would significantly harm the motion picture industry by imposing costs that don’t exist today. He said the proposed contracts fail to demonstrate that they serve the public purpose futures contracts should serve, and are highly susceptible to manipulation.

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