Federal regulators approve investment vehicle to allow box-office futures trading
Despite opposition from the major Hollywood studios, federal regulators voted 3 to 2 on Monday to approve an investment vehicle that will allow professional traders to bet on the ticket sales that a movie generates during its opening weekend.
The company that proposed the vehicle, Veriana, already won approval from the Commodity Futures Trading Commission for the exchange on which these contracts will be traded — the Trend Exchange — but it needed the commission to sign off on a contract to allow traders to begin placing positions.
The idea of betting on future box-office receipts has faced vociferous opposition from the movie industry, led by the Motion Picture Assn. of America, which has said the contracts would be vulnerable to manipulation and could even hurt how movies perform in theaters.
The MPAA has supported pending legislation that could ban any trading in box-office futures as part of Congress’ financial reform bill. The Senate has approved such legislation, but it will need to be approved by the House to make it into the final financial reform package.
After the Trend Exchange contract was approved, Veriana Chief Executive Rob Swagger harshly criticized both the MPAA and Sen. Blanche Lincoln (D-Ark.), who proposed the legislation banning box-office futures.
“This is probably the best handout that members of Congress have given to Hollywood in years,” Swagger said in a conference call. “It reeks of special interest.”
Swagger said he would go to Washington on Thursday to begin lobbying against the legislation, but he was also confident that an exclusion for his company could be grandfathered in if the bill is passed.
Swagger said Veriana hoped to launch the first contract this summer. In its application to the commission, Veriana proposed a contract for “Takers,” a thriller from Sony Pictures set to be released Aug. 20 starring Zoe Saldana and Hayden Christensen. A contract on the Trend Exchange would begin trading four weeks before opening day and would close out after the opening weekend based on the box-office returns reported by Rentrak.
Veriana and its supporters have argued that a box-office futures contract could allow movie industry participants to hedge their investment in case a movie doesn’t perform up to expectations.
“Maybe a star will say, ‘If a movie doesn’t perform the way I want it to perform, I want to make sure I can protect my downside,’ ” Swagger said.
The Commodity Futures Trading Commission in its decision wrote that a movie could be considered a commodity, and thus was eligible for a futures contract.
“A right or interest in movie revenue events is little different from a right or interest in a company’s earnings per share, a merger and acquisition between two companies, the release of major economic indicators or other events with economic or commercial significance,” the commission wrote.
But two of the five commissioners wrote dissenting opinions, based in large part on their definition of a commodity. Opening weekend box-office sales, they argued, simply don’t fit the bill.
“Unless some sensible judgment is exercised, we could approve terrorism contracts … or contracts on the likelihood of UFOs hitting the White House,” one of the commissioners, Bart Chilton, wrote in his dissent. “Each of these events could have economic consequences, but it is hardly appropriate under the [Commodity Exchange] Act to deem them ‘commodities.’ ”
In a follow-up interview, Chilton added that he was particularly concerned about the ability of studios to manipulate the price of a future through marketing and other decisions, which he said was very different from existing futures contracts related to agriculture and other products.
“It’s the first time in the [commission’s] history where one entity controls the product,” he said, referring to the studio that releases a film. “If you’re a corn producer, it doesn’t matter what you do on your farm, it won’t affect all U.S. corn production.”
This echoed the opposition that the MPAA and other industry groups have expressed in recent weeks. After the contract was approved, the MPAA, which represent the six major movie studios, expressed its dismay and said it hoped that legislation would overrule the decision.
“These proposed contracts fail to demonstrate that they serve the public purpose futures contracts should serve,” MPAA Interim Chief Executive Bob Pisano said. “We support banning them as the Senate bill does and hope that the final bill approved by Congress and signed by President Obama retains the prohibition.”
The MPAA has worked with other groups including the Independent Film and Television Alliance, the National Assn. of Theater Owners and the Directors Guild of America. If the legislation is approved, it would be only the second type of product for which futures contract are legally prohibited, along with onions.
Another company that wants to market box-office futures, the Cantor Exchange, is awaiting approval of its own contracts. The commission is set to rule on those contracts within the next month.
Whereas the Trend Exchange will be available only to professional traders, with a minimum trade of $5,000, the Cantor Exchange is marketing itself toward retail investors.
Chilton said he expected that the commission would also approve Cantor Fitzgerald’s proposed box-office futures, despite slight differences in how they would work.
“I think if things are going to change,” he said, “it’s going to come from Congress.”