WASHINGTON — Proponents of two proposed film futures exchanges defended their proposals on Capitol Hill Thursday amid an increasingly onerous political environment and skepticism among lawmakers about the viability of trading in weekend box office receipts.
But the teams behind the exchanges got a boost from an endorsement by Lionsgate’s vice chairman Michael Burns, who argued in a letter to a House Agriculture subcommittee that the market in domestic box office receipts “would substantially widen the number and breadth of financing sources available to the motion picture industry by lowering the risk inherent in such financing.”
The letter, sent April 16, was disclosed during the hearing of the Subcommittee on General Farm Commodities and Risk Management, which also brought testimony from Richard Jaycobs, president of the Cantor Exchange, and Robert Swagger, CEO of Media Derivatives, which has proposed another venture called the Trend Exchange.
Jaycobs and Swagger vowed that their planned marketplaces for movie futures would bring enormous value to the very film industry interests that have mounted such a vigorous and unexpected campaign against them.
“The notion that a regulated futures contract tarnishes an industry and is tantamount to ‘legalized gambling’ is not only outdated, but parochial and baseless,” Swagger told the subcommittee.
The panel’s hearing came a day after the Senate Agriculture Committee approved a financial reform bill containing a provision that would bar any trading related to a film’s B.O. performance. That provision and Thursday’s hearing reflect vigorous lobbying against the concept by the Motion Picture Assn. of America.
MPAA president and interim CEO Bob Pisano, making his first appearance before a congressional committee, repeated his assertions that the proposals “ought to be under the jurisdiction of the federal gambling and gaming laws, not the federal commodity trading laws.”
The proposals for the two exchanges are before the Commodity Futures Trading Commission, which has approved creation of the exchanges, but has yet to rule on the box office contracts. It will do so in June under statutory deadlines following a round of public comments, CFTC general counsel Dan Berkovitz told the panel.
Lawmakers questioned witnesses on fears expressed by MPAA and others that a box office futures market would be subject to manipulation, serve no public interest and amount to wagering.
Burns said in his letter that Cantor’s exchange “would allow a diverse group of motion picture industry participants, including studios, film distributors, theater owners, investors and other financial intermediaries within the motion picture industry to manage their risk and exposure to new film releases.”
Jaycobs said the goal of Cantor Exchange is to assist the motion picture industry by expanding the breadth and depth of financing sources. “Enlarging the potential sources of film financing will lower the cost of making a film, help create American jobs, and contribute to stabilizing large and small numbers of the industry alike as they face the challenge of raising financing in the high-risk endeavor of filmmaking,” he said.
Swagger echoed the promise of film futures as he depicted himself as an exec with strong ties to the film industry. He said his company’s plan “seeks to bring the demonstrable benefits of futures contracts — such as pricing transparency, liquidity and centralized clearing in a regulated environment — to the highly uncertain and variable outcome of movie box office revenues.”
“As we speak, unregulated foreign markets trade products upon movie box office revenues and related measures,” he told the subcommittee. Examples include Ireland-based InTrade, which is open to the public and entirely unregulated.
Jaycobs noted that for eight years, Cantor Fitzgerald’s virtual entertainment marketplace, the Hollywood Stock Exchange, has found that “hundreds of thousands of participants have not negatively impacted the virtual market domiciled on HSX.”
The two execs found support from Schuyler Moore, a UCLA professor, attorney and film financing expert who told the subcommittee that “every investment in film is gambling.”
“Studios gamble and investors gamble. That’s the industry, and we all accept it. What this exchange offers is an efficient and transparent way for these studios to lessen risk.” He predicted that manipulation would not be an issue for industry investors because they would make more on the upside than by shorting their own films.
Pisano was backed by Scott Harbinson of the Intl. Alliance of Theatrical Stage Emloyees. Speaking on behalf of IATSE and the Directors Guild of America, who cautioned that the negative perception of shorting would in itself put the commercial success of films at risk. “This new risk would not be generated by the people who spent years and invested millions making the film, but rather would be generated by those who are likely to have no real stake in seeing the film succeed so they can share in the reward.”
Pisano was backed by Scott Harbinson of the Directors Guild of America, who cautioned that the negative perception of shorting would in itself put the commercial success of films at risk. “This new risk would not be generated by the people who spent years and invested millions making the film, but rather would be generated by those who are likely to have no real stake in seeing the film succeed so they can share in the reward.”
This would impact individual employees and their health and pension plans, he said.
Subcommittee members grilled the witnesses on numerous topics and voiced personal misgivings about the commodities plans. Rep. Jim Marshall (D-Ga.) said he worried about the proposed adoption of firewalls to safeguard against manipulation of futures contracts, a first for commodities exchanges regulated by the CFTC. “A firewall is a license to lie,” the lawmaker mused.
Rep. Kurt Schrader (D-Ore.) was blunt in his assessment of the proposals. “I see no public interest in this,” he said. “The people most affected by it don’t like it.”
Meanwhile, a group of five senators, including Dianne Feinstein (D-Calif.), Barbara Boxer (D-Calif.), Al Franken (D-Minn.), Jeanne Shaheen (D-N.H.) and George LeMieux (R-Fla.), sent a letter to the commission’s chairman, Gary Gensler, saying that if the CFTC “lacks the clear legal authority to prevent the introduction of a futures contract that fails” a public interest test, “we ask you to inform us of this deficiency as soon as possible, so that Congress can properly consider whether to rectify this shortcoming during consideration of financial regulatory reform legislation.”