As Film-Futures Trading Clears One Hurdle, New Battle Flares

Just after passing one hurdle and getting approval from the Commodity Futures Trading Commission, film-futures trading hit a snag in Congress.

Sen. Blanche Lincoln, D-Ark., who oversees the commission and is chairman of the Senate Agriculture Committee, on Friday added a provision to financial reform legislation that would ban the commission from licensing firms to offer trading based on box office receipts.

“As Congress moves forward with financial regulatory reform, we are very grateful to Chairman Lincoln for seeking to put a stop to plans to allow wagering on box office futures, which are based on a faulty understanding of the film business and could cause real financial harm to both the film industry and other Americans drawn in by an online gaming platform that could be easily manipulated,” the group said in a statement.

It added: “This is just one in a series of upcoming regulatory steps, including requirements to have prior approval from the CFTC before these questionable contracts can actually begin trading.

"We intend to continue to urge the CFTC to reject both the proposal from Media Derivatives to offer a box office wagering service on its online marketplace, and a separate proposal that remains pending by Cantor Futures Exchange L.P. that would essentially allow real betting on what previously has been an online make-believe box office gaming site.”

Previously: 

One of two financial companies looking to establish futures trading based on domestic box office performance of movies received regulatory approval Friday, clearing a major hurdle. 

The ruling from the Commodities Futures Trading Commission sanctions Chicago-based Media Derivatives to create the infrastructure for movie-futures trading. The company still has to gain approval for the actual financial products that will enable trading on this exchange.

A Media Derivatives official told TheWrap that the company hopes to have its box office trading product approved — and up and running — sometime in the third quarter.

For its part, the CFTC mandated that Media Derivatives agree to more stringent oversight of its exchange than is typical with other futures markets. In fact, the company can’t self-certify any of the "contracts" that get traded on the exchange, but must seek commission approval for any new product launched within the market, which is known as the MDEX.

"The Commission has not approved the trading of any futures or options related to box office receipts at this time," a CFTC statement noted.

Separately, the commission will rule next week on a movie futures exchange being launched by Cantor Fitzgerald.

That exchange is also expected to be approved, with Cantor also requiring a separate approval for its trading product in order to commence operation.

Officials for both Cantor Fitzgerald and Media Derivatives, along with reps from the Hollywood oppositions, are expected to attend a House subcommittee meeting on this kerfuffle next Thursday.

In their quest to establish these markets, both firms have faced fierce opposition from a powerful Hollywood lobby, led by the Motion Picture Association of America.

On Friday, that group re-iterated its disapproval to the Commission, while also gaining further Congressional-member support from Sens. Patrick Leahy, D-Vt., and Orrin Hatch, (R-Utah.
In two separate letters sent Friday to Gary Gensler, chairman of the Commodities Futures Trading Commission, the Hollywood consortium asked that futures exchanges being established by Media Derivatives and Cantor Fitzgerald not receive sanctioning.

In what amounted to its second letter in a week in its attempts to deny approvals for Media Derivatives, the MPAA-led coalition argued that a futures market based on movie box office would operate much differently than one based on commodities like crops and energy products.

“A distributor for a variety of reasons could determine to substantially reduce or expand its marketing budget, which can materially affect opening weekend box office receipts,” the letter stated. “A major exhibitor could determine to show the motion picture on smaller or larger screens, which can materially affect audience interest and capacity.  (The Media Derivatives exchange) has no effective means to detect or prevent such conduct or to determine whether it was undertaken for valid business reasons rather than to manipulate futures prices.”

For his part, Leahy told the CFTC, “We are additionally concerned about the nature of these movie futures exchanges in the wake of the recent financial crises.”

Both Cantor Fitzgerald and Media Derivatives have argued that futures trading had nothing to do with Wall Street’s 2008 financial mess.

Both companies have stated their goal for creating these markets is to offset risk associated with film financing, giving producers, banking institutions and other film-funding sources tools to limit their exposure to flops or to greater participate in the hits.

The Hollywood opposition, meanwhile, has labeled these exchanges as “legalized gambling,” and is concerned about such markets being gamed and otherwise abused.