The team behind a plan to create a film futures exchange faces a scenario as cliched as a summer blockbuster: They won their first battle of regulatory approval, but the next big question is whether they can win the war.
After getting the go ahead from the Commodity Futures Trading Commission on Friday to create the Trend Exchange, Media Derivatives next must obtain the greenlight for the exchange’s trading contracts, tied to weekend box office receipts, and they face a challenge in convincing a very vocal and high profile lobby, led by the Motion Picture Assn. of America, that it will not only include effective safeguards, but that it actually will be beneficial to Hollywood.
There’s also the political landscape. Powerful lawmakers such as Sen. Patrick Leahy (D-Vt.) and Sen. Orrin Hatch (R-Utah) already have come to the studios’ side to express their concerns.
And fairly or unfairly, there is an effort afoot to lump the proposal into the very type of Wall Street excesses targeted as part of financial reforms.
On Friday, Sen. Blanche Lincoln (D-Ark.), chairwoman of the Senate Agriculture Committee, which oversees the CFTC, proposed Wall Street reform legislation that includes a measure to bar futures trading based on box office receipts.
Next Thursday, a House Agriculture subcommittee will hold a hearing on movie futures, generating extra attention and certainly a fair degree of posturing.
The Trend Exchange, and it stands to reason another proposed venture, the Cantor Exchange, also face skepticism on the part of members of the CFTC.
Even though they unanimously approved the creation of the Trend Exchange, the CFTC noted that they were required to do so because their application met the criteria set forth in the Commodity Exchange Act. Meanwhile, two commissioners expressed serious concerns about the contracts themselves, and one, Bart Chilton, said that he wouldn’t vote for them under their present form.
At this point in time, I have not heard any arguments to persuade me that ‘movie futures’ generally can overcome some fundamental design flaws,” he said in a statement. Among his chief concerns is that it would be difficult to protect consumers from price manipulation.
The commission has until June 7 to approve or reject the contracts.
In a conference call, Trend Exchange CEO Robert Swagger said Lincoln’s proposal and other opposition “doesn’t surprise me at all.” He said that it was common from industries new to futures trading, and the months ahead will be “no more of an uphill battle than any other part of the process.”
In fact, he was confident that their proposal for contracts tied to weekend box office, with trading in the four weeks before a film’s release, “will meet the test” of the commission’s approval. “Historically, groups that have opposed [certain futures trading] initially have come around and have been great supporters,” he said. “I don’t think the entertainment industry will be any different.”
He said they are planning a “studio outreach program” to explain and educate the industry on what the contracts are, hoping to counter misperceptions.
He says the exchange actually will add liquidity to the business, adding a risk management tool that has worked for centuries for agriculture and other industries. He’s even talking of offering other products across a wide range of media, and suggested other possibilities like contracts tied to the DVD market or an index of a number of films. He also said that several groups within the industry have inquired about forming partnerships or even taking an equity stake in the exchange, but he did not identify them.
While the MPAA has suggested that the exchanges would be akin to “unbridled gambling,” Swagger said that the exchange is aimed at institutional and professional investors. Studios have expressed worry that the market could generate negative attention for a movie in the lead up to its release, but Swagger said that the exchange was a way to counter the perils of of bad publicity, particularly that driven by social media, by hedging the risk. And while industry groups worry about insider trading and price manipulation, he contends that studios already have a “firewall” between that separates those who would be allowed to engage in trading and those who could not, like a studio distribution chief or even its CEO.
Studios have argued that there it’s next to impossible to control the flow of insider information, given the sheer number of people who have access to research or knowledge of marketing plans. What’s unclear is what restrictions would be placed on vendors, like box office tracking firms, and whether they could share data with, say, a hedge fund. Swagger said that certain vendors could potentially be prohibited from trading, but that it was “hard to put a blanket statement” over what would be allowed and what would not.
It’s those details that are likely to be highlighted and debated in the coming weeks, but so far there is little sign that studios are ready to throw their support behind the new market.
Last week, Swagger had lunch with MPAA’s interim CEO, Robert Pisano. On Friday, the MPAA, along with the Independent Film & Television Alliance, the Directors Guild of America and the National Assn. of Theater Owners, linking the exchanges not just to the fiscal meltdown, but to jobs.
Now is the time to strengthen and stabilize our financial system, not the time to open the floodgates on an untested, and unwanted plan that could cause serious harm to an important American industry and its workers.”