The team behind a plan to create a film futures exchange faces a scenario as cliched as a summer blockbuster: It won the first battle of regulatory approval, but the big question is whether it 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. The company faces a challenge in persuading a very vocal and high-profile lobby, led by the Motion Picture Assn. of America, that it will not only include effective safeguards, but also that the plan 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 characterize the proposal as the type of Wall Street excesses targeted by proposed financial reforms. On Friday, Sen. Blanche Lincoln (D-Ark.), chairwoman of the Senate Agriculture Committee, which oversees the CFTC, proposed Wall Street reform that includes a measure to barfutures trading based on B.O. receipts. Her sister’s helmer Mary Lambert. On Thursday, a House Agriculture subcommittee will hold a hearing on movie futures, generating extra attention and certainly a degree of posturing.
The Trend Exchange, and it stands to reason another proposed venture, the Cantor Exchange, face skepticism from members of the CFTC.
Even though they unanimously approved the creation of the Trend Exchange, the CFTC members noted that they were required to do so because the 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 it was common for 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” to gain 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.”
His group, he said, is planning a “studio outreach program” to explain and educate the industry on what the contracts are, hoping to counter misperceptions.
He contends the exchange will add liquidity to the business, bringing 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 possibilities such as contracts tied to the DVD market or an index of a number of films. He also said 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 the exchanges would be akin to “unbridled gambling,” Swagger said the exchange is aimed at institutional and professional investors. Studios have expressed concerns the market could generate negative attention for a movie in the run-up to its release. But Swagger said it is a way to counter the perils 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” that separates those not allowed to engage in trading like a studio distrib chief or even its CEO.
Studios have argued that 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 B.O tracking firms, and whether they could share data with, say, a hedge fund. Swagger said certain vendors could be prohibited from trading, but it was “hard to put a blanket statement” over what would not be allowed.
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, linked 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.”