Boxoffice futures market gets green light

Request by Trend Exchange approved Monday

Despite intense last-minute lobbying by major Hollywood studios, talent guilds and others, the first futures contract based on movie boxoffice results was approved Monday and are expected to start trading this year.

After delaying for a week, the U.S. Commodity Futures Trading Commission approved a request by the Trend Exchange to offer futures contracts and options on its MDEX Exchange aimed at large and institutional investors. The contracts would commence trading four weeks before a movie opened and end trading as the picture premiered on screens opening weekend.

The movie that was used as an example for the CFTC for a futures contract was Sony/Screen Gems' "Takers," which is scheduled to open Aug. 20, which means trading would commence the last week of July.

However, Media Derivatives CEO Robert Swagger said in a conference call Monday that "Takers" might not be the first movie. He said a group of movies will be offered but he did not say when. However, he indicated they expect to move fairly quickly.

Swagger came out swinging against the MPAA positioning his company as a David that had to defeat a Goliath. He said the MPAA is trying to suppress small business initiative at a time of economic troubles, and that they are trying to change the law to undo what the CFTC did which is fundamentally unfair.

"We know the MPAA will stop at nothing," Swagger said Monday. "They are a huge special interest group. They don't have to use this product, but there are a lot of other people who can and who will benefit from it. "

The MPAA on Monday issued a statement, jointly with allies at the National Association of Theatre Owners, IATSE, the DGA and the Independent Film & Television Alliance, charging movie futures are "no more than over-under bets on a movie's performance" and urging Congress to make the ban in the Senate bill the law of the land.

"It is unfortunate the CFTC has now given the go-ahead to a new gambling platform that could be plagued by financial irregularities and manipulation," the statement said.

Swagger fired back on the conference call with reporters.

"The MPAA can't accept the fact the regulatory body, the CFTC, has read through everything, that we worked with them for over a year, and they concluded these products do fall under their domain, that they can't be manipulated, that they are a commodity," he said.

Swagger also blasted Sen. Blanche Lincoln, who he believes is acting on behalf of the MPAA. He said she has inserted 53 words in a very large bill to stop movie future deriviatives and that is wrong. He called on the voters of Arkansas to stop her if no one else does. He said he will go to Washington on Thursday to make his case, lobby to get that amendment removed and to explain in more detail the plans for the first products to offer.

Swagger said his company's products -- to be marketed through brokers to wealthy individual investors and institutions, along with movie industry companies -- will require a minimum $5,000 investment. The exchange will list movies from four weeks before their wide release and only until the pics open.

The decision by the CFTC was on a vote of three commissioners in favor and two against. In his dissent, Commissioner Bart Chilton said that movie futures are not the kind of commodity that the futures market is set up to trade. Chilton said in his dissent the CFTC needs to "exercise some modicum of common sense" in deciding what is a commodity: "Concluding that motion picture revenue contracts involve an underlying commodity is fundamentally flawed."

"The first time that the CFTC has approved a contract where there is a single producer, a single entity controlling the entirety of the market," he added.

The Trend Exchange, located in Scottsdale, Ariz., and with offices in Chicago and elsewhere, is privately held by Veriana Networks.

This approval is separate from an application by the Cantor Exchange, created by Cantor Fitzgerald, to market futures contracts based on boxoffice receipts to smaller investors. The Cantor contracts and options would start before a movie opens and continue to trade until four weeks after a movie is in theaters.

Cantor also owns the Hollywood Stock Exchange, which has been doing something similar for more than a decade, but only as a game with no real money trading hands. Owning HSX, they have said, was to give them experience to prepare for real trading.

The Cantor product is even more controversial because it would be in the reach of smaller investors, and would continue to trade after a movie has opened, which means after extensive research has become available about who went to the movie and why, which can be used to predict how the boxoffice will perform.

While Trend Exchange has the green light, there is still legislation working its way through Congress that could derail the movie futures market. Senator Blanche Lincoln (D-Ark.), who recently won a primary that allows her to run again in the fall, has sponsored a bill, the Wall Street Transparency Act, which would prohibit such futures trading. The bill deals with larger issues concerning derivatives primarily and passage is far from assured.

Even if it does eventually pass and get signed by President Obama, there is some controversy about whether it would stop contracts and markets already put in play before it takes effect.

The idea of a futures exchange has been circulated for more than a decade, but has been slowed by events and obstacles. The movie industry didn't pay much attention until things heated up a few weeks ago when the CFTC gave approval to the backbone to create the two futures exchanges. The action on Monday was the approval of the first product to be put through the exchange.

In the last few weeks led by the MPAA's Interim CEO Bob Pisano, with support of movie exhibitors, the DGA, WGA, SAG and others, there has been a major effort to stop the idea of boxoffice futures. That has included lobbying in Washington, and a PR campaign. As recently as late last week 40 congressmen sent a letter to the leadership of the House Agriculture Committee, which oversees the CFTC, seeking to stop the creation of movie futures.

Backers have argued that movie futures are a new way to finance movies and to hedge the risk of movie financing. The studios have said it is a form of legalized gambling and there is no interest in or need for such a method of financing, and that no studio would ever bet against its own movie.

In testimony before the CFTC on May 19, Trend Exchange CEO Robert Swagger said they have been working with the CFTC staff to refine their product to meet both the law and the public need. He said he isn't worried about insider trading and in fact they do not intend to even try to prohibit such activity.

"The CEA does not prohibit insider trading by market participants in the commodity futures and options markets," said Swagger, "based upon the premise that barring insider trading would defeat the market's basic economic function of allowing traders to hedge the risks of their commercial enterprises. In other words, virtually every commercial hedger has some amount of inside information."

The most high-profile person in Hollywood to back movie futures has been Lionsgate vice chairman Michael Burns, who was one of the founders of HSX in the 1990s. He has said that it would be a way for smaller studios, producers, exhibitors and independent movie financiers to leverage their investments.