The attempt by two companies to set up exchanges listing
futures on how well films perform at the US box office has
blown up into an angry public argument, and is forcing US
regulators to think hard about what sorts of uses derivatives
can be put to.
On May 19, the Commodity Futures Trading Commission held a
public meeting to hear both sides of the argument, and help it
in its deliberation over whether to permit such contracts.
The regulator has already approved the formation of two film
futures exchanges: the Media Derivatives Exchange on April 16
and the Cantor Futures Exchange on April 20.
But the CFTC has not yet approved any contracts for them to
trade, and it is by no means certain that it will.
When they concurred in the establishment of the exchanges,
three of the CFTC’s five commissioners took the
unusual step of placing on record their doubts about the merits
of movie futures.
The proposed contracts are billed as a way to help investors
in films, or their distributors, hedge their risk that a
particular film will succeed or fail at the box office. The
idea is that for a defined period before or just after a
film’s release, the exchange will list a future
whose settlement value will reflect its box office revenue in a
given period, say four weeks, after its theatrical release. The
amount people are willing to pay to receive this amount will
reflect the market’s view of its likely size.
The dispute over whether such contracts should be allowed
has become increasingly heated, with accusations flying in both
The most vocal opponent of film futures has been the Motion
Picture Association of America, which represents the Hollywood
studios. Robert Pisano, the association’s interim
chief executive, has attacked the product as tantamount to
gambling and said it has no place in the film industry.
"We have never thought about hedging our risk or selling a
movie short," he said at the CFTC hearing. "The first time we
do that will be the last time we ever work with those
filmmakers and, once it becomes public in the community, it
will be the last time many filmmakers will work with us."
Pisano said the contracts would be easy prey for
manipulation because of the inside knowledge possessed by those
involved in the film itself. He also questioned the legitimacy
of standardising a product when each movie is so unique.
Defending the incumbents?
But Richard Jaycobs, president of Cantor Futures Exchange,
dismissed the MPAA’s concerns, accusing it of
being motivated by self-interest. Because the MPAA represents
the biggest Hollywood studios, Jaycobs argued that it is trying
to prevent any mechanism that might allow smaller studios and
independent filmmakers to secure a greater market share.
Speaking to FOi a week before the hearing, Jaycobs said: "We
have been working on this exchange for two years –
this is not a new initiative to the CFTC and neither are any of
the issues. But since we went public with these ideas, I have
been surprised by the reach of the MPAA’s
"They have lined up many people to speak about the negative
attributes of this idea and, I must admit, they caught us by
surprise. They are terrified of losing control of their
monopoly on the film industry and are utilising all their
resources to convince people this is a bad thing."
Jaycobs added: "On top of that, I am not sure, given some of
their comments, that the CFTC commissioners fully understand
the detail of this product and issues at stake here. They just
seem to have been echoing the concerns of the MPAA. All we want
is a fair discussion about the merits of such an exchange and
for the decision-makers to fully understand the issues before
making a decision."
Jaycobs also brushed off the specific concerns expressed by
opponents. He said the futures would not be open to
manipulation because of the robust nature of the way box office
receipts are recorded. An independent company called Rentrak
Theatrical collates information on movie takings from across
Any effort to manipulate the final settlement figures,
Jaycobs said, would have to involve box office takings being
over- or underestimated by tens of thousands of tickets.
He was also at pains to allay concerns about the markets
being manipulated by insiders. "We have incredibly
sophisticated surveillance techniques – if someone is
going to manipulate this market, we would know about it," he
Jaycobs said this product was something Cantor had been
interested in for more than a decade. But he stressed that it
would not have been possible 10 years ago, because the
technology to quickly and reliably collate box office receipts
was not available.
"The US film industry is a $10bn a year industry. That is
small by the standards of the US bond markets but it remains a
valuable part of the economy that could be enhanced by this
futures market," he said.
After hearing testimony from both sides, however, the CFTC
commissioners still seemed unsure of the new products. Bart
Chilton, despite saying the products were "cool", added that he
was worried by the fact that the success of a movie relied on
so few individuals. "There is only one producer of a movie, one
studio, which has great influence – even control
– over how well a movie will do."
Chilton, it seems, is concerned about the role the studios
might play in this market. An email received from his office
argues that studios can directly influence the success of their
films through, for example, the amount they spend on marketing,
or the extent to which they release stars to do media
Given this knowledge and influence, should the studio be
banned from participating in this market and, if so, how could
the futures contracts act as a viable risk management tool?
But it is not just participants with everything to lose or
gain who have strong opinions on this matter –
apparently neutral but informed parties seem to as well.
The Futures Industry Association seemed initially to defend
the idea. It issued a statement on April 8 rebutting the
MPAA’s suggestions that movie futures could lead
to "rampant speculation and financial irresponsibility".
The FIA said: "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
But the industry body seems to have since adopted a more
"We are not taking a view on the proposed film futures," a
press officer told FOi. "We did issue a statement in response
to comments from the movie industry about the regulation of
futures in general but we have no comment on the particular
contracts in question."
Not so reticent in giving an opinion is Max Keiser, who once
set up the Hollywood Stock Exchange – a virtual market
in which investors can buy and trade virtual shares in
celebrities and movies.
It was acquired by Cantor Fitzgerald in May 2001 and,
according to Jaycobs, it now boasts more than a million users
and 20,000 trades a day.
Keiser now lives in France and has a TV show called the
Keiser Report aired on Russia Today, which describes itself as
"a no holds barred look at the shocking scandals behind the
global financial headlines".
"This would not serve to hedge risk in any sense," says
Keiser. "All it would do is apply financial trickery and
ultimately ruin yet another perfectly good American industry.
It would spin a $10bn industry into $100bn of speculation and
do to Hollywood what it once did to the US energy market.
"There is no underlying product and so it amounts to just
sheer hype by Wall Street."
Keiser believes it is fortunate that the MPAA has "figured
out what a horrible thing this would be for the film industry"
in time to save it.
This heated debate now looks set to continue until June 7
for the Media Derivatives Exchange and June 28 for the Cantor
proposal – the final dates by which the CFTC must
decide whether to validate the contracts for the new
Despite the misgivings of some of the commissioners, it is
still possible that a new market for film futures will get the
go-ahead. The CFTC can only ban a new product if it
specifically violates its code – not just because
commissioners have doubts about it.