The Commodity Futures Trading Commission is expected to vote June 21 on the first of two petitions to trade futures contracts based on motion picture box office returns. The CFTC had been slated to decide Monday whether to grant Media Derivatives a license for its film futures trading venture, but instead it granted the firm a one-week extension on its petition.

It said Media Derivatives had requested the delay so it could review the futures and options product submissions to the agency by its Trend Exchange unit. It is referring to the two types of contracts proposed by Media Derivatives that would be based on domestic B.O. revenues for individual films rated by the MPAA.

Media Derivatives declined comment on Monday.

Media Derivatives and the Cantor Exchange, a second proposed B.O. futures trading venture, had been enjoying a routine ride through the CFTC regulatory process with final approval expected this month. But sudden opposition from the MPAA and a coalition of Hollywood interests has made approval anything but a slam dunk (Daily Variety, June 2).

At the request of the coalition, the agency held a public hearing last month to hear insights from its staff as well as experts on both sides of the suddenly controversial B.O. futures issue. Bob Pisano, MPAA's interim CEO, was among the detractors voicing fears that the proposed exchanges amounted to gambling vehicles that would do great harm to the industry.

Trend Exchange CEO Robert Swagger and Cantor Exchange topper Richard Jaycobs repeated their assertions that the MPAA's campaign to derail the proceedings is based on unfounded fears.

Meanwhile, House-Senate conference committee began work this week on financial reform legislation, urged on by the White House. The Senate measure contains a provision that would bar any trading of futures based on motion picture box office revenues. The conferees had earlier set July 4 as a deadline for their efforts to reconcile the two bills, but the White House wants them to reach agreement before President Obama heads for an economic meeting in Toronto this month.

The MPAA said it was appreciative of the CFTC's extension on the decision regarding Media Derivatives.

"We believe both the proposal by Media Derivatives, Inc, and a separate proposal by the Cantor Futures Exchange L.P., which is also still pending before the CFTC serve no public interest and, to the contrary, can significantly harm the motion picture industry and impose new, substantial costs that do not exist today," said Greg Frazier, MPAA exec veep, in a statement Monday. "These are proposals that ought to be under the jurisdiction of the federal gambling and gaming laws, not the federal commodity trading laws."

By PAUL HARRIS, Variety

, June 2, 2010

Hollywood's mini-drama over the prospect of trading in weekend box office receipts appears to be headed for a climax -- but the battle may say as much about each side's lobbying prowess as it does the merits of the film futures exchanges. By Monday, the Commodity Futures Trading Commission will decide whether to approve Media Derivatives Inc.'s plans for film futures trading, the first of two proposals tied to a movie's returns. That vote likely will signal the fate of a second proposal for the Cantor Exchanges, which the commission will decide on separately by June 28.

But the spotlight then will shift to Capitol Hill, as a House and Senate conference committee is hoping to iron out the differences on financial reform legislation. The Senate's version of the reform bill includes a provision that would ban the trading in box office receipts.

The relatively quick, three-month battle appears to favor the studios and their lobbyists, who are dead set against the idea of such "popcorn prediction markets," as they have been dubbed.

However, executives with the exchanges believe that a commission vote in favor of their idea will be a powerful signal to House and Senate conferees to keep the ban out of the final legislation.

"What I find most disappointing is that in the absence of this potential ban by Congress, all of the different points of view can be brought together through the regulatory process and ironed out," said Richard Jaycobs, president of the Cantor Exchange. "We know that some of the studios expressed an interest in investing, but any such conversation would get cut off by a ban."

He and others argue that the markets for box office receipts are a new risk management tool that proponents claim is urgently needed by the cash-strapped film industry, particularly in the indie sector. It would allow parties with financial interests in the film production and revenue chain to hedge the risks of producing motion pictures. Because of worries over conflicts of interest and insider trading, studios contend that it's unclear who would and would not be allowed to participate.

Up until mid-March, little attention had been paid to the exchanges. By the time that the commission looked ready to give its approval to the creation of Media Derivatives' Trend Exchange, the regulatory proceedings had followed the standard course, including a round of public comments that had closed four months earlier. Not a single objection had been lodged to either the Cantor or Trend exchanges.

But on the evening of March 23, the commission received a letter from MPAA's interim CEO Robert Pisano disclosing the org's opposition. It said the proposed movie futures contracts "may be inherently vulnerable to price manipulation." Rather than serving any commercial purpose, "movie futures will simply allow the public to bet on whether a movie will be successful at the box office," the letter warned.

The issue had suddenly appeared on the MPAA's radar screen and demanded immediate attention, according to Pisano. "We don't routinely monitor matters before the CFTC and we simply weren't tracking it," he explained. Pisano called it "ironic" that the issue came to the MPAA's attention only weeks after the departure of MPAA chairman Dan Glickman, the former Kansas congressman and Secretary of Agriculture who was steeped in the intricacies of commodities futures.

The letter was the opening salvo in a vigorous campaign by MPAA to halt both proceedings in their tracks. Pisano immediately formed a broad coalition of large and small producers, labor unions, distributors, exhibitors, and others to help voice its fears that the "synthetic derivatives" created by the proposed B.O. exchanges could seriously damage the industry.

The MPAA team also rushed to Capitol Hill just as the Senate Agriculture Committee was considering the sweeping Wall Street reform bill eagerly awaited by President Obama. Within days of meeting with committee chairman Blanche Lincoln (D-Ark.) and others, a provision was quietly inserted into the measure to bar futures trading based on B.O. receipts. Caught in the turbulence of the MPAA's sudden campaign were two bewildered entrepreneurs, Media Derivatives CEO Robert Swagger and Cantor's Jaycobs, both of whom had begun publicizing their plans in earnest in anticipation of approval. Their business plans had been bolstered by input from numerous film industry execs including some from within MPAA member companies.

Pisano concedes that "relatively non-senior executives within some member companies" had participated in discussions about B.O. futures. "But there is absolutely no dissent among senior leaders of the six studios and (the DGA) that this should not happen," he said.

Jaycobs and Swagger were forced to amass their own cadre of supporters and press them into duty before a hastily arranged House hearing in April. "The notion that regulated futures contracts amount to legalized gambling is not only outdated, but parochial and baseless," Swagger countered at the hearing.

Even though financial industry experts came to the defense of Jaycobs and Swagger -- and the financial services sector has a notorious lobbying influence on Capitol Hill -- it's been a tough sell to lawmakers.

Pisano says he is also optimistic about favorable votes from the two forums. "We established very conclusively during our testimony that these synthetic derivatives don't meet the statutory criteria of the Commodities Exchange Act," he said. As for Congress, "it seems very clear that this issue has broad bipartisan support."

Regardless of which side is victorious, bitterness over the costly lobbying fight is certain to linger.

Jaycobs said he finds Pisano's rationale for the tardy CFTC filing to be disingenuous. He claims his company even kept Glickman in the loop, and that it has e-mails acknowledging receipt from the former MPAA topper. Swagger said his company has acted in good faith and carefully followed every procedure before the CFTC.

Asked if there is a specific film that he would find appropriate as a new release investment vehicle, Jaycobs wasted little time in replying. "It would be 'Mr. Smith Goes to Washington.'" Swagger also has a ready answer: "Groundhog Day."

By Paul Bond, The Hollywood Reporter, May 20, 2010

Lionsgate vice chairman Michael Burns again sided with Cantor Fitzgerald and Media Derivatives and against the MPAA and other Hollywood groups Wednesday, telling regulators that trading in boxoffice futures should be allowed.

Several speaking in favor of the proposals told the Commodities Future Trading Commission in Washington that the ability to hedge risk via futures trading would amount to business as usual for studios, which are accustomed to spreading risk on pricey projects. They also argued that the question of whether studios decide to use such a financial instrument is irrelevant to whether boxoffice futures trading should be allowed.

"I think this is a tool we could use and all the studios would want to use to mitigate risk," Burns said.

The Lionsgate exec was one of the founders of the Hollywood Stock Exchange, a just-for-fun listing of boxoffice projections now owned by Cantor. He previously stated his support for the for-profit proposals in written remarks filed with regulators.

Burns' testimony was rebutted by MPAA interim CEO Bob Pisano.

"The first time we go short against one of our own movies, it will be the last time we ever work with those filmmakers," Pisano said. "And once that becomes public in the community, it will be the last time many filmmakers will work with us."

Movies have little in common with the sort of commodities one usually associates with futures trading, like orange juice or wheat, he contended. "Every single movie is unique," Pisano said. "You can't commoditize them."

He likened boxoffice futures to a gambling contract that "should not be given the cloak of authenticity."

Burns' backing of the plan notwithstanding, Pisano added that "the entire movie industry" is against boxoffice futures.

But the MPAA chief was outnumbered Wednesday, with six testifying in favor and two against.

CFTC officials seemed impressed with the case being made on behalf of boxoffice trading but stopped well short of indicating their support.

Commissioner Bart Chilton commended Cantor and Media Derivatives for coming up with "something that is neat and novel."

Chilton also called their plans "cool" but added, "I'm not sure cool is a business."

Cantor Futures president Richard Jaycobs said major studios might have enough cash to produce and distribute movies, but indies don't. A trading mechanism to help hedge losses could be useful, he reasoned.

He also chided the major studios for operating "in a financial world where their prognostications about a film's economic potential go unchallenged."

Clark Hallren of entertainment consultancy Clear Scope Partners said up to 40 banks once engaged in film loans and investments, but now there are nine.

"You can invite more capital into the business if you give them a way to control the volatility," Hallren said.

But Pisano called boxoffice futures "wildly speculative synthetic instruments."

"We don't need a repeat in our industry of what happened in the mortgage industry," he added.

Though the hearing made for interesting political theater, the matter could become moot before the CFTC renders a decision, likely next month. The U.S. House and Senate are readying a financial reform package containing language that would prohibit boxoffice futures.

Movie Futures Market Approved
Major studios have opposed betting on boxoffice

By Paul Bond, April 16, 2010

The trading of boxoffice futures could begin by the third quarter now that federal regulators have granted approval for Media Derivatives to launch its Trend Exchange.

But while TrendEx, as it calls itself, has a right to exist as a designated contract market as of Friday, it still needs approval to specifically trade futures tied to boxoffice receipts.

On Friday, the five members of the Commodity Futures Trading Commssion voted unanimously -- though at least a couple said reluctantly -- to approve TrendEx, and they'll take up approval for boxoffice trading before a June 7 deadline.

TrendEx is one of two companies, the other being Cantor Exchange, trying to convince regulators -- and skeptical studio executives -- that creating a market around movie boxoffice can be a useful tool for hedging investments.

The MPAA, DGA, National Association of Theatre Owners and others are vehemently opposed to the idea and have all but promised never to use such financial instruments. And they seem to have convinced some lawmakers to take up their cause, most notably Sen. Blanche Lincoln, the Arkansas Democrat who, as chairman of the Senate Agriculture Committee, holds sway over the CFTC.

On Friday, Lincoln added new language to an existing draft proposal for legislation that would outlaw the trading of contracts based on "motion picture boxoffice recipts, or any index, measure value, or data related to such receipts."

Speaking during a conference call with reporters Friday, TrendEx CEO Robert Swagger said such a move unfairly takes into account the opinion of the six largest studios over all other participants in the movie industry.

"If they don't let a product like this become available, it's not hurting the big studios, it's hurting all the independents," he said.

He also suggested that the MPAA, even if it wins its battle against TrendEx, likely would still lose the war.

"The MPAA could be upset and targeting not only myself and Cantor today, but the (Chicago Mercantile Exchange) could self-certify these products and start trading them tomorrow," he said.

An MPAA lobbying blitz has encouraged other lawmakers beyond Lincoln, and from both parties, to express their concerns to the CFTC.

MPAA interim CEO Robert Pisano said in a letter Thursday to CFTC chairman Gary Gensler that boxoffice futures are fraught with the sort of peril that would lead to lawsuits against studios filed by unsuccessful traders.

But Swagger said Friday that, even while the MPAA has been working against TrendEx, "several of the constituents of the MPAA" have been working with TrendEx to help design the boxoffice exchange.

He also said the film financing community is expected to benefit from boxoffice futures whether or not the big six studios participate in trading, and he said TrendEx has lined up partners -- some from the entertainment industry -- who are interested in taking an equity stake in the company.

"There's a lot of liquidity that's dried up in the entertainment industry," Swagger said. "All we do is simply bring other individuals to the table that can help assume part of that risk with the potential of receiving part of the upside."

Swagger said that if all goes well with the June 7 deadline, wagering on opening weekend boxoffice performances of widely released films will begin in the third quarter, and other instruments would follow. One he suggested involves investing in slates of movies, as opposed to individual pics.

He said TrendEx has no intention of competing directly with Cantor's plan whereby individuals and entities would wager on how much movies take in at the domestic boxoffice during their first four weeks of release.