Regulators voicing concerns about new futures market for box-office receipts

Wednesday, May 19, 2010

Regulators express concerns on movie futures

WASHINGTON — People who finance movies have come up with a way to make money even when a film goes bust.

But before investors can trade future box office receipts much like soybeans and corn, the federal government must give its blessing.

On Wednesday, the government’s top commodities regulators heard the arguments for and against creating new trading exchanges to follow the ups and downs of Hollywood. But they were not yet sold on the idea.

They must first determine if the concept meets legal requirements, how they would monitor trading and potential manipulation, and whether it would benefit the industry.

“I think it is pretty cool,” said Bart Chilton, a member of the Commodity Futures Trading Commission, said about the idea of a Hollywood exchange. “But I’m not sure that cool means a business.”

Moviemaking is a business and like all business it is not immune to economic conditions. Creating an exchange to hedge against big-budget flops would help generate new capital for the industry. Investor groups that put up the money for films are making the case for the exchanges.

It also could be used for speculation.

Major Hollywood studios strongly oppose the idea. They say rival studios could sabotage films by betting against them. A studio could bet against their own movie, knowing it will lose money. Some even worry that the kind of complex trading that crushed the housing market could someday do the same to their industry.

“We don’t want to repeat in our industry what happened in the mortgage industry,” Robert Pisano, the acting CEO of the Motion Picture Association of America, told commissioners. The proposed futures market “is a nightmare to try to control the use of inside information,” he said.

The regulators have already approved the establishment of two new online exchanges but must vote by next month to approve specific contracts so the exchanges can operate.

A strained economy and limitations on lending have made it harder to finance movies. Executives associated with the movie industry told the federal panel they would welcome the new source of capital.

A new futures market would reduce uncertainty and give investors “an objective, clear result” that would bring them back to the moviemaking table, said Schuyler Moore, an attorney who represents industry financiers.

“I guarantee you the studios will be using this,” Moore insisted. The Motion Picture Association of America, which represents the big studios and is leading the opposition, “has lost their mind on paranoia on this issue,” Moore said.

It wasn’t exactly Hollywood on the Potomac, but lively argument unfolded as regulators expert in how commodity markets work strained to understand the peculiarities and exotic financing mechanisms of the movie business. Quips and plays on movie titles flew.

Commissioner Scott O’Malia wished moviemakers great success, noting the industry’s importance to the U.S. trade balance. Still, he added, “they have put up a lot of stinkers.”

Like Chilton, other commissioners said they had concerns and that a rigorous review was needed.

“I don’t know where we’ll come out,” CFTC Chairman Gary Gensler said.

By law the agency must approve or reject the contracts, which would establish rules for trading on projections for box office receipts, within 90 days of the request. That means a June 7 deadline for the Media Derivatives, or MDEX, contracts and June 28 for the Cantor Futures Exchange. If no action is taken by the end of the 90 days, the contracts are deemed approved.

MDEX’s first proposed contract is for receipts for the movie “Takers,” opening Aug. 20, featuring a cop played by Matt Dillon who takes on a team of expert bank robbers. The Cantor exchange’s first contract is for “The Expendables,” coming Aug. 13: Sylvester Stallone directs and stars with Jet Li and Jason Statham in a tale of mercenaries betrayed on a mission.

In addition to the Motion Picture Association, opposition has come from the National Association of Theatre Owners, the Directors Guild of America, and the Independent Film and Television Alliance.

In Congress, Sen. Blanche Lincoln, D-Ark., has proposed banning futures trading on movie receipts as part of the financial regulatory overhaul before the Senate.

Investors would be able to hedge against potential flops by pre-selling a share of future box office receipts. The exchanges could even guard against likely hits, such as the upcoming “Harry Potter” and “Twilight” sequels, falling short of projections. If a movie doesn’t do as well as expected, investors would at least be guaranteed revenue from those pre-sales, known as futures contracts.

The Motion Picture Association represents the major Hollywood studios, including those belonging to The Walt Disney Co., News Corp., Time Warner Inc. and others.

(This version CORRECTS name of exchange to MDEX)

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