Media Derivatives CEO warns on b.o. futures

Says provision in reform bill sets a dangerous precedent

A provision of the Wall Street reform bill that would ban futures contracts based on movie boxoffice would set "a dangerous legislative precedent," the CEO of Media Derivatives wrote Wednesday in a letter sent to every member of the Senate.

Robert Swagger's company is one of two trying to launch commodities exchanges aimed at doing what the amendment to a bill authored by Sen. Blanche Lincoln, D-Ark., would outlaw. Lincoln added the prohibition after hearing from the MPAA, exhibitors, Hollywood guilds and others.

"Banning a futures contract at the request of a powerful special interest group like the MPAA sets a dangerous legislative precedent," Swagger wrote. "It undermines the role of the existing regulators and sets up a case that any time a new contract is developed, opponents will run to Congress," which would then make a decision "solely for political reasons."

Media Derivatives and Cantor Fitzgerald have been granted initial permission by the Commodities Futures Trading Commission to create exchanges. However, the real battle lies ahead as they seek permission for the specific products they want to sell to investors and the public.

Separately, a letter was sent to the CFTC by six members of the House of Representatives, including Henry Waxman, D-Calif., expressing concerns about movie futures and asking that consideration be delayed until Congress acts on the Wall Street reform bill, which they say is likely to have a dramatic effect on how the CFTC looks at all derivatives.

Their letter says that "many members of the House Agricultural Committee," which has jurisdiction over the CFTC, "express concerns that movie futures would be extremely susceptible to market manipulation."

The CFTC is expected to consider a request by Media Derivatives for contracts aimed at large investors that would close sale just before a movie opens on or about June 7, which is the deadline by which the regulators must act. That would be followed by consideration of a product proposed by Cantor that would be accessible to smaller investors and one that would cover a period from before a movie opens until a month after its release.

Swagger noted that a ban on such contracts by Congress has happened only once before -- in 1958, when trading in onion futures was prohibited. Swagger said Congress should leave it to the CFTC to decide whether movie futures trading would be "in the public interest and conform to the requirements" of the regulatory agency.

Swagger pointed to testimony before a House committee last week at which THR contributor and attorney Schuyler Moore supported movie futures trading as a way to provide "efficient risk management tools for the entertainment industry." He also noted the support of Lionsgate co-chairman Michael Burns, who has said such an exchange would "become a terrific hedging vehicle for the studios."

Moore and Burns represent exceptions to the general reaction from the movie industry. MPAA interim CEO Robert Pisano testified that the studios would never use the futures market to hedge its bet on movies.

The six House members told the CFTC in their letter that many of those who might use such a market as a hedge would be excluded as insiders, meaning that "the only participants remaining are those looking to use movie futures as a high stakes gambling tool."
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