As Capitol Hill lawmakers, studios and showbiz unions try halt proposals for film futures trading, the creators of the exchanges are pushing back by questioning the timing and the legal authority of federal regulators to delay or even deny their efforts.
The Commodities Futures Trading Commission has a deadline of Friday to approve or deny the first of the exchanges, Media Derivatives Inc. (MDEX), which would operate the Trend Exchange. It has an April 20 deadline to rule on the proposed Cantor Exchange, owned by Cantor Fitzgerald. Each is looking for permission to offer products tied to the B.O. performance of films.
The teams behind the exchanges, attempting to counter studio lobbying on Capitol Hill, have called into question the MPAA’s rationale for waiting until the last minute to object to their proposals, which have been on the table for some time (since last fall, in the case of MDEX). They also contend that checks and balances and oversight will prevent some of the concerns that have been raised by studio officials.
Robert Swagger, the CEO of Media Derivatives, wrote in a letter to the CFTC last week that there “is no legal basis to postpone acting on or to disapprove” its application. Moreover, he noted that the commission had a “statutory obligation” to act on the application within a 180-day time frame, one that expired on March 24 but was extended until Friday after the MPAA raised its objections.
He said the delays could “establish a dangerous precedent” that would signal to other applicants that they “should exercise extreme caution in committing substantial resources to implement their ventures, as they may never obtain the timely finality of a decision.”
The MPAA has raised a host of concerns, including fears that the markets could be manipulated, and has expressed wariness on how contracts would be priced. The org is expected to go into more detail in a filing today, citing areas where the exchanges would not serve the public interest. Howard Gantman, a spokesman for the MPAA, said that they were only made aware last month that the exchanges were imminent, when Cantor demonstrated its offerings at ShoWest, generating media coverage.
The studios have since lobbied extensively in Washington, including members of the House and Senate agriculture committees, which have oversight over the CFTC.
Since its first letter to the commission on March 23, the MPAA has been joined in its opposition by the DGA, IATSE, the Independent Film and Television Alliance and the National Assn. of Theater Owners. And earlier this week, a group of lawmakers including California’s two senators, Dianne Feinstein and Barbara Boxer, sent letters to the CFTC urging it to delay the process.
In an interview Wednesday, Swagger said his group has also reached out to lawmakers, but said that “our main focus is really dealing directly with the CFTC.”
“I think undue political pressure being put on the professional people on the commission is not really appropriate,” he said.
If the company is denied its application, it could sue the commission, although Swagger did not raise that possibility in the interview.
But in his letter to the CFTC, he noted that the commission’s staff gave the application their recommendation. Moreover, he noted that the process of approving the exchanges and approving what is sold on them is separate, and should be treated as such. The latter comes with a separate deadline period, with comments due today.
“The MPAA concerns are no different than similar concerns historically expressed by such groups when contracts related to their industry products were developed,” Swagger wrote to the CFTC.
The Trend Exchange will have what it calls “surveillance features” to monitor trading activity, and will be able to “tag any unusual or excessive trading activity for review.” To guard against insider influence, they note that the contracts will be listed only for four weeks in advance of a film’s release, where the “market has a great deal of information at its disposal to render trading decisions, and marketing plans are well in to the execution phase.” Addressing concerns that a studio or distributor could have box office information earlier than the public, trading would cease prior to a movie’s release in theaters.
Moreover, Swagger argued that the exchange would be a tightly regulated alternative to what already is going on. He wrote in a separate letter on March 26, “One need look no further than the Hollywood Stock Exchange and the foreign, unregulated market of Intrade, which offers a plethora of so-called ‘contracts-for-differences’ based upon box office revenues, all of which were devoid of any regulation.”
Larry Harris, professor of finance and business economics at USC’s Marshall School of Business, and the former chief economist for the Securities and Exchange Commission, said the studios’ opposition stems from the fact that they “do not want this information to be public because they are afraid that moviegoers may judge a film by these market prices and that could create a potential problem….What the studios fear is that the information produced on these futures markets may have an adverse impact on their movie sales and distribution plans.”
Richard Jaycobs, the president of the Cantor Exchange, said he continues to meet with senior industry executives to explain its proposal. “The application is sound,” he said. “Our goal is to work with the entertainment folks, and if a particular product design is not the right one, then we will find the right one.”
He added that it would be highly unusual for the commission to deny approval, particularly in the case of Media Derivatives where the proposal is just one day away from the deadline. “Anything can happen, and the government certainly has a right to do that, but there is no historical precedent for it,” he said.