Request by Trend Exchanged approved Monday
By Alex Ben Block
June 14, 2010, 05:16 PM ET
Despite intense last-minute lobbying by major Hollywood studios, talent guilds and others, the first futures contract based on movie boxoffice results was approved Monday and are expected to start trading this year.

After delaying for a week, the U.S. Commodity Futures Trading Commission approved a request by the Trend Exchange to offer futures contracts and options on its MDEX Exchange aimed at large and institutional investors. The contracts would commence trading four weeks before a movie opened and end trading as the picture premiered on screens opening weekend.

The Trend Exchange, located in Scottsdale, Ariz., and with offices in Chicago and elsewhere, is privately held by Veriana Networks.

This approval is separate from an application by the Cantor Exchange, created by Cantor Fitzgerald, to market futures contracts based on boxoffice receipts to smaller investors. The Cantor contracts and options would start before a movie opens and continue to trade until four weeks after a movie is in theaters.

Cantor also owns the Hollywood Stock Exchange, which has been doing something similar for more than a decade, but only as a game with no real money trading hands. Owning HSX, they have said, was to give them experience to prepare for real trading.

The Cantor product is even more controversial because it would be in the reach of smaller investors, and would continue to trade after a movie has opened, which means after extensive research has become available about who went to the movie and why, which can be used to predict how the boxoffice will perform.

While Trend Exchange has the green light, there is still legislation working its way through Congress that could derail the movie futures market. Senator Blanche Lincoln (D-Ark.), who recently won a primary that allows her to run again in the fall, has sponsored a bill, the Wall Street Transparency Act, which would prohibit such futures trading. The bill deals with larger issues concerning derivatives primarily and passage is far from assured.

Even if it does eventually pass and get signed by President Obama, there is some controversy about whether it would stop contracts and markets already put in play before it takes effect.

The idea of a futures exchange has been circulated for more than a decade, but has been slowed by events and obstacles. The movie industry didn’t pay much attention until things heated up a few weeks ago when the CFTC gave approval to the backbone to create the two futures exchanges. The action on Monday was the approval of the first product to be put through the exchange.

In the last few weeks led by the MPAA’s Interim CEO Bob Pisano, with support of movie exhibitors, the DGA, WGA, SAG and others, there has been a major effort to stop the idea of boxoffice futures. That has included lobbying in Washington, and a PR campaign. As recently as late last week 40 congressmen sent a letter to the leadership of the House Agriculture Committee, which oversees the CFTC, seeking to stop the creation of movie futures.

Backers have argued that movie futures are a new way to finance movies and to hedge the risk of movie financing. The studios have said it is a form of legalized gambling and there is no interest in or need for such a method of financing, and that no studio would ever bet against its own movie.

In testimony before the CFTC on May 19, Trend Exchange CEO Robert Swagger said they have been working with the CFTC staff to refine their product to meet both the law and the public need. He said he isn’t worried about insider trading and in fact they do not intend to even try to prohibit such activity.

“The CEA does not prohibit insider trading by market participants in the commodity futures and options markets,” said Swagger, “based upon the premise that barring insider trading would defeat the market’s basic economic function of allowing traders to hedge the risks of their commercial enterprises. In other words, virtually every commercial hedger has some amount of inside information.”

The most high-profile person in Hollywood to back movie futures has been Lionsgate vice chairman Michael Burns, who was one of the founders of HSX in the 1990s. He has said that it would be a way for smaller studios, producers, exhibitors and independent movie financiers to leverage their investments.

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