The US Commodity Futures Trading Commission initiated a public hearing on May 19 into the feasibility of futures and binary options linked to movie box office receipts.
No vote on the contracts was held, but the watchdog’s commissioners expressed doubts about the validity of the contracts, though they conceded that US law might prevent them from banning them.
In April the CFTC permitted two box office futures exchanges to set themselves up – Media Derivatives Exchange and Cantor Futures Exchange. But there were strong objections from several heavyweights in the US motion picture industry, the regulatory approval was slow in coming, and three of the five commissioners took the unusual step of publicly registering their doubts about the merits of such futures.
The CFTC has not yet approved any contracts for the exchanges, and has insisted that any new contracts they launch must gain its approval.
Yesterday’s hearing centred on the regulatory authority MDEX is seeking for its futures and options contracts based on the opening weekend revenues for the film Takers, a movie about bank robbers. Cantor Futures Exchange hopes to list a contract linked to four-week box office receipts for The Expendables, a film about mercenaries starring Sylvester Stallone.
While promising to keep “an open mind” in the hearings, the five CFTC commissioners in their opening statements all raised issues on which they wanted clarification.
“There are a number of questions I have regarding whether these contracts can serve as a useful hedging tool, how they will be settled and whether they are susceptible to manipulation,” CFTC commissioner Jill Sommers said.
Just like the hearings into whether the CFTC should permit the new exchanges, yesterday’s meeting drew polarised opinions.
Robert Pisano, interim chief executive of the Motion Picture Association of America (MPAA), was particularly dismissive of the new contracts at the recently launched exchanges.
“I can accept that there are circumstances when financial engineering synthetic derivatives play a role, but they certainly don’t play a role in the process of creating this uniquely American product,” Pisano said. “I think we got something close to, or indeed, a gambling contract and it should not be given the cloak of authenticity by being traded as a future.”
Pisano added that the MPAA believes there is no need for the new products. “We have never ever thought about hedging our risk or selling a movie short, and we never will,” Pisano said. “The first time we do that, the first time we go short against one of our own movies, it will be the last time we ever work with those filmmakers, and once that becomes public in the community, it will be the last time many filmmakers will work with us.”
Pisano said the new contracts would be easy prey for manipulation, given the amount of insider information on a film that could leak. He also questioned the legitimacy of standardising a movie as a commodity when each is so different.
Richard Jaycobs, president of Cantor Futures Exchange, went to work to reassure the CFTC, arguing that despite the objections of some in the movie market – notably the MPAA, the new products would prove extremely useful for “independent film producers and others in the motion picture industry” by expanding the “breadth and depth of financing sources available to the industry by allowing lenders and investors to hedge risk”.
Jaycobs conceded that the new products had not been welcomed by the MPAA, but he said it was important to recognise that the movie market was larger than one association.
“The MPAA represents the six largest studios in Hollywood,” Jaycobs said. “Together these studios largely control the distribution of films and are uniquely able to fund the large advertising budgets so crucial to a film’s box office success. However, it is important to point out that the film industry consists of many participants.”
He also attempted to allay concerns about manipulation. “Opponents state that ‘the complete lack of any legitimate economic pricing before the Rentrak numbers are announced prevents any ability to even identify a manipulated price’.”
Jaycobs argued: “The final settlement value of a Domestic Box Office Receipts contract represents the movie ticket purchases of millions of American consumers over a period of approximately four weeks. These purchases are reported by movie theatres, tabulated by Rentrak Theatrical, and published by studios. Therefore any effort to manipulate the DBOR contract’s final settlement value would require tens of thousands of ticket sales to be under- or over-reported.”
Despite the impassioned testimonies from both sides, the CFTC commissioners seemed unsure of the new products.
Commissioner Bart Chilton expressed his doubts. Despite saying the products were “cool”, he said they may just be too narrow to be approved. “Movie derivatives differ greatly from corn or wheat,” Chilton said. “There is only one producer of a movie, one studio, which has great influence – even control – over how well a movie will do.”
Sommers, however, hinted that that despite the commissioners’ misgivings, the contracts could yet pass. “Section 5c(c) of the Commodity Exchange Act mandates that we approve these contracts unless we find they violate the Act.”
According to the rules of the CFTC, the regulator must rule on the application within 90 days of the contract submission. This means the commission must act by June 7 on MDEX’s proposal and by June 28 on that by Cantor Futures Exchange.
Colin Packham, Sydney firstname.lastname@example.org