(ALSO READ: "What You Need to Know About Movie Futures Trading.")
The way things are going, Hollywood might just get its wish. Trading on predicted box-office performance might not happen.
But given the state of film finance over the last 18 months, the question should probably be asked:
Is a little “legalized gambling” -- as the MPAA calls it -- really such a bad thing?
Though two proposals for movie futures trading have passed muster with the Commodity Futures Trading Commission, an all-out ban has been tacked onto the Senate's sweeping financial reform legislation.
If it passes -- and unless financiers Media Derivatives and Cantor Fitzgerald come up with an alternate plan -- the film industry could be missing out on a valuable tool that would ease the risk assocated with making movies.
That, in turn, could free up the vise grip on movie funding.
“Futures markets have been used to mitigate risk in various segments of the economy for years,” Robert Swagger, CEO of Chicago-based Media Derivatives, told TheWrap. “And there are a long list of hedge funds, private equity firms and banks which have removed themselves from the film-financing sector because they have no way to offset the risk."
(See accompanying story: "Swagger to Congress: Remove the Ban.")
“Our exchange is designed to meet the very strong capital needs of the film industry right now,” added Richard Jaycobs, president of Cantor Exchange.
Led by the Motion Picture Association of America, the opposition lobby has succeeded in characterizing these exchanges as mere betting on movie box-office performance.
But the fundamental purpose of any futures exchange, the backers say, is to reduce risk, not create more of it.
In fact, futures markets date back to ancient Greece, and have, in modern times, regulated prices for everything from heating oil to bread, offering market participants tools to hedge their positions and mitigate the unknown.
Too invested in a flop, or say, bummer potato crop? Set your bid low. Not invested enough for a sure-fire hit or bumper onion yield? Set your bid high.
“I now have some idea of what my heating bill will be next year,” Jaycobs told TheWrap, noting that the now-accepted practice of futures trading on oil was a controversial subject back in the 1980s.
“Every film is a gamble, so we should get away from calling (movie futures trading) ‘gambling.'” said Schuyler Moore, a professor who also helps investors buy into movies, testifying on behalf of Cantor Fitzgerald during last week’s House subcommittee hearing on the movie-futures issue.
“I guarantee there will be an enormous flood of financing for the studios,” he said. “This is an efficient way to off-shoot risk. There is always fear of something new. All it does is create an efficient transparent market that is absolutely needed. Studios will come to appreciate it.”
Perhaps more than anything else, the opposition has successfully tied innovative new markets based on movie futures to the kinds of risky derivatives trading that created the Chernobyl on Wall Street 18 months ago.
