three of the five commissioners put on record their misgivings
about movie futures, and emphasised that just because they had
permitted the exchange’s establishment, that did
not mean they would grant the separate approvals needed for its
In addition, Cantor Fitzgerald, the New York-based
brokerage, who first proposed the idea of a movie futures
exchange in 2008, has won CFTC approval to establish a
designated contract futures market, but not approval for the
trading of motion picture box office receipts.
The idea of box office futures is that market participants can
bet on the quantity of revenues a certain film will make in a
given period after its release. This instrument would allow
film makers and distributors to hedge the commercial risk of a
concept draws on the experience of "opinion markets" in which
people wager on the outcome of an event such as an election.
Such markets have sometimes proved good predictors –
perhaps because they synthesise the knowledge of many
Exchange is owned by Movie Derivatives, a company wholly owned
by Veriana Networks of Scottsdale, Arizona.0
Film body opposed
In recent weeks the Motion Picture Association of America has
urged the CFTC to block the exchanges. It argued movie futures
would be unacceptably risky and could lead to "rampant
speculation and financial irresponsibility".
Futures Industry Association backed the idea, telling the CFTC:
"No one can argue that the movie-making business is without
risk or that there is no need for effective risk management
tools. The potential introduction of innovative instruments for
managing that risk should be applauded rather than
April 16, the CFTC approved the application, begun on September
25, to register Trend Exchange as a designated contract market.
It also approved the exchange’s rules.
Minneapolis Grain Exchange will clear the
exchange’s contracts, which will be based on
revenue data collected by Rentrak Corp. The National Futures
Association will provide trade practice and market surveillance
and other compliance services.
CFTC reminded Media Derivatives of its obligation to set
position limits and position accountability levels.
Contracts not allowed yet
But the CFTC has not yet signed off any contracts for the
exchanges, and trading cannot begin until it has. Opening
Weekend Box Office Revenue binary options and collared futures
have been submitted by TrendEx for its approval.
alongside its order granting the Trend Exchange DCM status, the
CFTC also published two statements, one from commissioners
Scott O’Malia and Jill Sommers, and one from
commissioner Bart Chilton.
statements concurred with the decision granting DCM status, but
expressed the commissioners’ doubts that movie
derivatives would be beneficial.
Sommers said: "We have serious concerns regarding the trading
of media contracts and we support a very thorough review of all
of these first-of-a-kind products to ensure they will provide a
useful commercial hedging tool and are free from fraud and
that while the Commodity Exchange Act allows DCMs to
self-certify contracts, in this particular case, a condition
has been imposed on Media Derivatives, that the CFTC must
approve each contract it introduces.
O’Malia’s statement concluded by
they expected CFTC staff soon to review the proposed contracts
and inform the Commission whether they satisfy the
they wrote, "we expect that Commission staff will review
and have a
thorough understanding of: (1) whether the contract provides a
useful hedging tool for a variety of industry
participants and investors with commercial exposure on both the
long and short side of the contract; (2) whether the contract
is susceptible to manipulation or distortion; (3) whether the
cash settlement of the contract is at a price reflecting the
underlying cash market; and, (4) whether the price is based
upon a cash price series that is reliable, acceptable, publicly
available, and timely."
commissioners said these conditions were relevant to the
approval of both a traditional cash-settled futures contract
and a novel one such as the box office receipts
MDEX’s contracts fall short of these conditions,"
they warned, "then it is our opinion that approval is not
permitted under the Act."
hint at several weaknesses the commissioners perceive with
movie futures. While it is easy to see that producers and
distributors might want to hedge downside risk, what market
participants have "commercial exposure" that would be harmed if
a film performed well?
are controversial because futures and options are traditionally
used to hedge risks that are beyond the control of any one
market participant, and where a movement of the underlying in
one direction benefits some players and harms others.
Commercial risks such as the success or failure of a film might
be judged too susceptible of influence by insiders to
constitute a fair proposition for third parties.
It is not clear
whether the commissioners’ points 3 and 4 are a
torpedo that could sink movie derivatives or a more modest
expression of concern.
commissioners mean they will only permit box office futures if
there is a transparent underlying cash market in forecasts of
movie revenues, then that is a bar the new exchanges cannot
leap – there is no such market.
If, on the
other hand, they merely mean that the "price series" could be
the data gathered on movie revenues after the fact, then these
conditions could presumably be fulfilled fairly easily.
Chilton looks for 'legitimacy'
commissioner Bart Chilton expressed his view with more
vehemence and colour.
concur in the Commission’s action," he began,
before explaining that the CFTC was only approving the
application because it had no choice – it was obliged
to rule within a specified time and could only turn down an
application if the would-be exchange did not satisfy the
The agency has
until June 7 to approve or disapprove the contracts submitted
on March 9. Chilton said: "While I certainly promote innovation
in futures markets, I remain adamant that I will not cast a
vote to approve a contract that I believe serves no legitimate
risk management purpose, that cannot be used to effectively
price a commodity, or that is inherently susceptible to
that even though the Commodity Futures Modernization Act of
2000 had removed the test that contracts must serve an economic
purpose, the CFTC’s mandate was still "to oversee
markets that provide a means for 'managing and assuming price
risks’ and 'discovering prices’", as
well as protecting consumers from price
"significant concerns" about box office futures in each of
these areas, he said, before concluding "I have not heard any
arguments to persuade me that 'movie futures’
generally can overcome some fundamental design
Jon Hay +44 207
779 8372 email@example.com