U.S. regulators approved the first futures market based on movie box-office returns over the concern of lawmakers and Hollywood executives that the exchange may expose studios to speculative harm.
The Commodity Futures Trading Commission voted 5-0 today to let Veriana Networks Inc.’s Media Derivatives Inc. unit open a market for professional traders to make financial bets on how well a new movie will do in ticket sales. A plan by Cantor Fitzgerald LP to create a market that includes retail investors is pending before the commission.
Media Derivatives’ market, to be called Trend Exchange, “will help better manage economic uncertainty and financial volatility,” Rob Swagger, chief executive officer of the Scottsdale, Arizona-based company, said in an e-mailed statement today after the vote.
CFTC Commissioner Bart Chilton called it a “popcorn prediction market,” and Senate Judiciary Committee members warned CFTC Chairman Gary Gensler in a letter yesterday of the risk of “creating perverse incentives for movie failure that may undermine the integrity of the industry.”
Hollywood studios that participate by hedging their films’ prospects will doom ticket sales, said Peter Guber, chairman and CEO of independent production company Mandalay Pictures LLC.
“The word will get out in three seconds and the picture will be a complete catastrophe,” said Guber, who was chairman and CEO of Sony Pictures Entertainment in the early 1990s.
‘Serious Concerns’
The CFTC must still approve the type of contracts to be dealt before Trend Exchange can begin. The company has said its first product will center on opening-weekend box office.
Product approval is “a very different question” from exchange approval and raises “significant concerns,” Chilton said in an e-mailed statement. He said he had “reluctantly” concurred in today’s vote.
“We have serious concerns regarding the trading of media contracts and we support a very thorough review of all of these first-of-a-kind products,” CFTC Commissioner Scott O’Malia said in an e-mailed statement.
U.S. Senator Blanche Lincoln, an Arkansas Democrat, today added language banning trade in movie futures to a broader derivatives bill she is writing. Lincoln is chairman of the Agriculture Committee that oversees the commodity commission.
Media Derivatives’ market plans to begin trading in the third quarter, Stephanie DiIorio, a company spokeswoman, said before the vote.
Potential for Manipulation
Activity on the exchanges would bring about “risky and manipulative” behavior, said Patrick Leahy, the Vermont Democrat who heads the Senate Judiciary Committee, and Senator Orrin Hatch, a Utah Republican.
“I’m worried about manipulation,” Chilton said in an interview on Bloomberg Television before the vote.
Media Derivatives said in a filing to the CFTC that a movie’s cast, plot, storyline, budget and “word of mouth” would be considered before exchange officials list the film.
Professionals would use the market to hedge risk to movie investments from “catastrophic events such as the World Trade Center bombing, to climate events such as severe snow storms,” the company said. It said its initial offerings would be based on domestic box office sales in a film’s opening weekend.
Media Derivatives told the commission its proposed market could transfer financial risk from producers, studios and theaters to “a community of speculators willing to assume these risks” in return for being paid a premium.
Movie Financing
The U.S. recession has reduced financing for movies, which cost an average of $107 million each to make in 2007, by studios that face declining DVD sales, increased piracy and more criticism on Internet sites, Media Derivatives said in a filing.
“Every other segment of our economy has had a means to offset risk,” Swagger said in an interview that aired today on Bloomberg Television. “The entertainment industry has not had an opportunity for futures-type contracts.”
Movies would be required to have a content rating, and show on at least 600 U.S. screens. Contracts wouldn’t be listed more than 30 days before a release. Trading would end the day before the opening.
“I just don’t know if this is something that makes sense,” said Representative Collin Peterson, a Minnesota Democrat and chairman of the House Agriculture Committee, in a conference call with reporters.
“A kernel of wheat is a kernel of wheat,” said Peterson, whose committee oversees the CFTC. “Movies are very subjective.”
He said he had “significant questions about this whole idea.”
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