US Film Futures Not Yet A Box Office Hit

by Glen Shapiro, LawAndTax-News.com, New York

29 April 2010

Shortly after the United States Commodity Futures Trading Commission (CFTC) approved two applications to establish movie box office futures exchanges, a Senate committee added an amendment banning such products into the draft bill aimed at putting tighter restrictions on exotic derivatives.

The proposed movie futures would be priced on the expected box office receipts of a film. An investor who bought a futures contract would make a profit if the movie did better than expected in the first few days after its release, when the contract could then be sold at a higher price. Of course, if the opposite happened, an investor would make a loss. It is expected that contracts would be listed from 30 days before, and trading would end the day before, a film’s release.

A form of gaming on the success, or otherwise, of films has been around since 1996, when the ‘Hollywood Stock Exchange’ was formed. Its website allows people to use simulated dollars to trade shares for fun in films and their stars. Cantor Fitzgerald, a firm hoping to establish one of the new futures exchanges, bought the website in 2001.

The CFTC has approved the applications of Media Derivatives and Cantor Futures Exchange for designation as contract markets. However, while the Commodity Exchange Act requires it to approve such applications if the applicant meets the Act’s criteria, the CFTC is still considering both of their requests to approve the movie box office futures contract.

In addition, given the novel nature of the contracts that both firms have proposed trading, the CFTC has requested that they must submit all new classes or categories of media-related contracts it lists for specific approval. The CFTC has made it clear that it has not yet approved the trading of any futures or options related to box office receipts.

In fact, a good deal of opposition has been mustered against those contracts ever being traded. It has been said, to receive general acceptance, the contracts must be seen to provide a useful hedging tool for the movie industry in general, and also be free from any possibility of fraud or manipulation.

The Motion Picture Association of America (MPAA), representing the film studios, has been leading opposition to the proposed contracts - an entertainment industry coalition including creators, independent producers and distributors, major film studios and cinema owners.

MPAA President, Bob Pisano, has said the proposed contracts “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. These are proposals that ought to be under the jurisdiction of the federal gambling and gaming laws, not the federal commodity trading laws.”

Information on the expected success or failure of films has been around for some time, but has, until now, been normally restricted to and produced for the movie industry. The two proposed market operators promise safeguards against fraudulent or insider trading, rules about who can trade and close control on any unusual activity. But others say that it would be inevitable that certain market participants, by hook or by crook, would obtain more information than ordinary investors.

Opponents of movie futures trading scored a major victory when the Senate’s Agriculture Committee (which, surprisingly, has jurisdiction over futures markets) approved an amendment to the financial regulatory reform bill excluding any instruments wagering on “motion picture box office receipts (or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.”

That bill is now due to proceed before the full Senate, but the battle is also opening on another front. A House committee is to hold a public hearing on the issue of movie box office futures, and the two sides will again be out in force presenting their cases.

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