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In April, the Commodity Futures Trading Commission (CFTC) approved the creation of markets for trading box office futures, essentially contracts investors can buy or sell based on individual films’ box office receipts. A typical contract would begin trading six months prior to the release of the film to which it pertained, and if ticket sales for that film turned out to be higher than the sales level specified by the contract, the party betting on the film’s success would make money while the party betting against the film would lose money. Contracts traded on the exchange operated by Cantor Fitzgerald would enable any investor to profit from predictions about box office receipts for the first four weekends of a film’s release. Although individuals have been able to place fantasy bets of a similar nature through Cantor’s Hollywood Stock Exchange since 1996, the new Cantor exchange will allow investors to play with real money instead of “Hollywood Dollars.”
However, before any trading can occur on these box office futures markets, the CFTC must approve the specific contracts sought to be traded. At a hearing before the CFTC last Wednesday, Cantor argued that the futures contracts would enable movie makers to hedge the risk of their investments, and would benefit the industry by reducing the cost of film financing. The Motion Picture Association of America (MPAA) argued to the contrary that the proposed contracts constituted illegal wagers rather than legitimate futures contracts, and that trading in such contracts would harm the industry as viewer perception of films would be influenced by pre-release trading in a film’s futures, and by false information about films spread by those seeking to profit in the box office futures market.
At the Wednesday hearing, Cantor argued that its futures contracts would benefit the film industry both by reducing financing costs through the creation of a market for determining a film’s value, and by enabling distributors to hedge the risk that a given film would underperform at the box office. Cantor opined that the box-office futures prices and contract settlement prices would be accurate and not subject to manipulation. The futures prices, it argued, would be correctly set through the information-gathering efforts and transactions of market participants, and that the contract settlement price – total ticket sales – would be accurately reported by movie theaters, subject to audit and verification.
The MPAA on the other hand characterized Cantor’s proposed box office futures contracts as gambling contracts proscribed by the federal Wire Act rather than legitimate futures contracts that would serve the public interest as required by Section 3 of the Commodity Exchange Act (CEA). According to the MPAA, while the price of a legitimate futures contract under the Act must be tied to a commodity market and reflect the forces of supply and demand, the value of an individual movie – or, its ticket sales – can be substantially influenced by the actions of relatively few insiders, and can be manipulated by traders who spread false rumors about a film in advance of its release. Furthermore, the MPAA’s representative stated that the contracts were not necessary for risk-hedging because studios already employ sufficient hedging strategies such as partnering with other companies to share risk, diversifying projects across different segments of the viewing audience, and producing a variety of types of pictures (low budget and high budget, teen and adult, comedy and drama, and horror, etc.). Finally, the MPAA claimed that Cantor’s contracts could not be used to hedge risk because the contracts expressly prohibited trading in the futures by studio insiders.
While the full arguments of each side are more complex than can be adequately addressed here, and it is impossible to predict what the CFTC will decide, the MPAA argument appears more compelling if for no other reason than the obvious: movies, as individual works of art, do not bear a close resemblance to commonly traded commodity futures such as onions, fuel, and grain.
– Emily Beverage
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