Update, Monday 3:25 p.m.:
Shortly after getting federal approval for his movie-futures trading plan, Richard Jaycobs, president of Cantor Fitzgerald’s exchange, said Monday that congressional action will prevent the company from moving forward.
He cited the financial reform legislation expected to be approved this week by Congress, which includes a ban on box-office trading.
"Cantor Exchange wishes to express its appreciation to the hundreds of motion picture professionals who advocated for box office futures contracts, including all those who publicly Jaycobs their support and those who wrote letters of support to the CFTC and members of Congress," he said in a statement.
"We are, however, aware that a bill reported out of the House-Senate conference last Friday continues to include a provision banning box-office receipts as the basis of any futures contract. In light of this pending legislation, Cantor is continuing to assess its options for providing risk management and financing tools to the motion-picture industry."
A company spokesperson said the company is assessing trading other products on the exchange that have nothing to do with the movie industry.
The Commodity Futures Trading Commission Monday gave a second OK for a firm to trade film box office futures, even as Congress readies to enact legislation that could ban the trading.
The commission, in a 3-2 vote, approved Cantor Fitzgerald’s request to begin trading. A week ago, the commission by an identical vote approved Media Derivatives' request. Media Derivatives uses Trend Exchange as its brand name for its market.
Congress, however, is expected to pass financial reform legislation this week that includes a ban on the commission approving trading in movie box office futures — though the success of the bill could be affected by the death Monday of Sen. Robert Byrd.
How passage of the legislation would affect Cantor and Media Derivatives has been up for question.
The Motion Picture Association of America and some Capitol Hill aides say the legislation would ban any trading — even that already approved by the commission after June 1. Media Derivatives, on the other hand, insists the ban only affects additional applications for trading, and that trading already approved by the CFTC are “grandfathered” and can go forward.
Courts may eventually be called on to decide who is right.
If Media Derivatives presses forward, the most likely scenario is that the CFTC would make a determination on how to proceed, and any resulting decision would face a court challenge.
In approving the request, the commission majority said that federal law requires commission to approve trading unless it can reach a finding that a trading instrument violates the act.
“Based on our review, the commission does not believe that the terms and conditions violates the act or the commission’s regulations.”
Commissioner Jill E. Sommers reiterated her dissent of two weeks ago. Commissioner Bart Chilton reiterated his dissent, too, but he added some comment.
“The contracts are not, in my view, ‘commodities’ under the definition contained in the Commodity Exchange Act. If movie futures can be traded, we could also have terrorism contracts or death pool contracts. None are good ideas,” he said in dissent.
“Second, the contracts are subject to disruptive trading and manipulation because movie studios have a tremendous influence on box office returns. In no other commodity does one entity have the ability to control the settlement price. If you are a movie studio and you alter your marketing budget for a film, that could impact (and no question does) box office returns.
“Finally, I am not convinced that these contracts are needed as a hedging tool or that they would receive more than occasional use. The agency has received a few letters that would suggest a real need for these contracts. Certainly there has been no outcry to use these markets as a hedging tool.”
Although both Cantor and Media Derivatives want to trade movie box office futures, their proposals for trading are very different.
Cantor’s proposal is aimed more towards the general public.
The company proposed offering futures contracts costing as little as $50 that are based on one millionth share of box office revenue of box office grosses for the first four weeks of a picture in wide release. Trading would begin six months before a movie’s release.
Media Derivatives is aimed more at professional traders. It would offer both futures and options based on box office revenues the first weekend of a movie’s release with each of the futures contracts initially costing at least $5,000. Trading would launch a month before a movie’s release date.
Cantor initially proposed trading Lionsgate’s “The Expendibles,” while Media Derivatives proposed trading Sony Pictures’ “Takers.” Both futures companies made clear the films were examples with the exact film replaceable depending on when approval came.
Big movie studios have joined with Hollywood unions to intensely fight the trading, warning it could “harm the motion picture industry.”
In appearances in Congress, at the commission and in legal filings, they’ve argued that the proposed trading “could harm a motion picture’s prospects by negatively affecting financiers and audiences perceptions of it.”
“Motion pictures slated to open in limited theaters and then broaden based on word of mouth could be ruined by futures pricing that casts them in a false light of a failed opening,” MPAA interim CEO Robert Pisano said in testimony at the commission.
They’ve also argued that the futures couldn’t really be used to hedge investments, that box office numbers could be manipulated, that trading would create new burdens on studios and conflicts of interests for studio employees. Finally they’ve argued that the trading is more gambling than commodities trading.
The two companies and their supporters have argued that the trading not only could be used to hedge investments, but that the ability to hedge would lots of additional investment money to Hollywood and end up fueling a growth in the number of pictures made each year.
Lionsgate broke with other big studios to support the trading.
“We believe a market in domestic box office receipts would substantially widen the number and breadth of financing sources available to the motion picture industry by lowering the risk inherent in such financing,” said Lionsgate vice chairman Michael Burns in a letter sent the House Agriculture Committee.