Thursday, April 22, 2010

CFTC Green-Lights a Film Derivatives Market

Original posted on Business Week by Todd Shields and Michael White:

Financial innovation is far from dead. Two companies, Cantor Fitzgerald and Media Derivatives, are planning rival futures markets for speculating on movie box-office returns. The U.S. Commodity Futures Trading Commission approved the idea on Apr. 16.

The early reviews from Hollywood and Capitol Hill are miserable. Members of the Senate Judiciary Committee warned CFTC Chairman Gary Gensler in an Apr. 15 letter that encouraging such speculation would risk "creating perverse incentives for movie failure that may undermine the integrity of the industry." Senator Blanche Lincoln, an Arkansas Democrat, has included language banning the futures in a broader derivatives bill approved by the Senate Agriculture Committee on Apr. 22.

The film industry would hate the idea, says Peter Guber, CEO of the independent production company Mandalay Pictures. Promoters of film futures suggest that entertainment financiers might want to hedge their investments in a movie by betting some money that it will fail. No way, says Guber: "The word will get out in three seconds, and the picture will be a complete catastrophe." The media would focus on the financiers' doubts; word-of-mouth would turn poisonous.

For cinematic futures to get off the ground, the CFTC would have to provide additional approvals for the details of the new trading operations. That further permission is far from assured, warns Commissioner Bart Chilton. Final clearance of what he calls a "popcorn prediction market" would be "a very different question" from allowing the bare-bones notion of the exchanges to move ahead, Chilton says via e-mail. He told Bloomberg TV before the CFTC vote that he was "worried about manipulation."

The financial services firm Cantor Fitzgerald already owns Hollywood Stock Exchange, a Web site where fans use imaginary currency to bet on movies. Media Derivatives has said that its first real-money film futures will focus on opening-weekend box office. The company plans to begin trading in the third quarter of 2010, according to spokeswoman Stephanie DiIorio.

Media Derivatives CEO Robert Swagger predicts that movie futures would "help better manage economic uncertainty and financial volatility." In a filing, the company added that trading would hedge risks related to calamities ranging from terrorism to "climate events such as severe snow storms."

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