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Bank to the futures-part 2.

Wall Street: Money Never Sleeps (Gordon Gekko is back) is not due for worldwide release until September 2010, but fear not, Hollywood is providing bankers with another form of Beverly Hills meets Wall Street type of entertainment. The battle for the hearts, souls and wallet of cinemagoers has taken a new turn.

In the June 2010 edition, Banker Middle East reported on the row over box office futures and on 14 June the Commodity Futures Trading Commission (CFTC) found that the terms and conditions of the proposed Weekend Motion Picture Revenue futures and options contracts submitted by Media Derivatives, Inc. (MDEX) "do not violate the Commodity Exchange Act or the Commission's Regulations."

It declared that the contracts (commonly referred to as 'movie futures') consist of a collared futures contract and a binary call option contract on opening weekend motion picture pevenues for the motion picture, Takers.

The CFTC said that the contracts "are intended to allow participants in the motion picture industry to manage the financial risks associated with the production and distribution of motion pictures."

Thus the announcement went out that the CFTC had narrowly voted 3-2 in favour of allowing box office futures to be traded. Some cheered while others jeered.

The CFTC explained that, "Movie revenues fall into the same category as many other commodities for which futures and options contracts have been either approved by or self-certified to the Commission where the underlying commodity is a non-price-based measure of an economic activity, commercial activity or environmental event. "The underlying commodity may not be directly traded, so there is no cash market for the commodity, but the commodity reflects some measure of economic activity or event that can be used for a hedging purpose when incorporated into a futures or options contract."

It went on to say that, "Movie revenues are the basis for a multi-billion dollar industry. A right or interest in movie revenue events is little different from a right or interest in a company's earnings per share, a merger and acquisition between two companies, the release of major economic indicators or other events with economic or commercial significance."

Schuyler Moore, a partner at law firm Stroock and an Adjunct Professor of Entertainment Law at UCLA Law School and UCLA Anderson Business School wrote on The Wrap (which describes itself as "the fastest growing news organisation covering the business of entertainment and media") that, "Right now, we are in a serious trough, with the last wave of financing from New York equity and hedge funds long gone. We need to have a sustainable approach to raising vast amounts of financing, and the Exchange will do just that."

However, Commissioners Bart Chilton and Jill Sommers voted against the move. "There are a number of questions which I believe have never been answered and although staff has recommended approval of these particular MDEX Opening Weekend Motion Picture Revenue futures and binary options contracts, it is unclear to me how they fit into our current regulatory structure. While the definition of 'commodity' is rather broad, it is not without limits. The statement of the Commission does not appear to recognise a limit to that definition," Sommers said.

This was supported by Motion Picture Association of America (MPAA) President Bob Pisano who said the proposed MDEX contract, and a separate proposal by Cantor Futures Exchange, which is still pending before the CFTC, "serve no public interest and, to the contrary, can significantly harm the motion picture industry and impose new, substantial costs that do not exist today. These are proposals that ought to be under the jurisdiction of the federal gambling and gaming laws, not the federal commodity trading laws. It is unfortunate that the CFTC has now given the go-ahead to a new gambling platform that could be plagued by financial irregularities and manipulation."

However the CFTA statement said that, "While the Commission believes that the opening weekend motion picture revenue numbers are not readily susceptible to manipulation, 'false rumours' or misreporting of data may exist in the motion picture industry, just as it does with many other industries. Although such conduct might be a violation under Section 9(a)(2) of the Act (barring false reporting), the possibility of such rumours or misreporting does not constitute a legal basis to conclude that a proposed futures or options contract would violate the Act."

Richard Jaycobs, the President, Cantor Futures Exchange told Banker Middle East that, "The CFTC decision addressed all of the MPAA's issues and basically concluded that those issues were without merit. Even the two commissioners that dissented really didn'tCadisagree with that conclusion - instead they raised concerns that the definition of a 'commodity' might be too broad andCapermit a futures contract on whether 'a UFO might hit the White House.' We still have a political issue - we're working with several key members of Congress to remove any reference to banning box office receipts from the financial reform legislation."

Veriana, the media and technology company which owns the Trend Exchange (aka Media Derivatives) said it was grateful that it had received approval from the CFTC to trade futures and options products based on Motion Picture Box Office receipts. "We are pleased that the staff of the CFTC and a majority of the commissioners recognised the legitimate economic risk management benefits that these products will provide to the entertainment industry," it said in a statement. "We intend to launch our products as soon as possible.

"At the same time we regret that a special interest group of Hollywood industry insiders chose to politicise the issue. We will fight attempts by this group to overturn the CFTC outcome in Congress. As the recent CFTC hearings on movie futures products made abundantly clear, there is a large base of participants in the entertainment industry that value the introduction of these products."

The Los Angeles Times newspaper noted that, "The Cantor Exchange, a Media Derivatives competitor, is awaiting approval of contracts for its own movie futures market" and its report on the CFTA decision provoked a flurry of rather colourful responses.

"Talk about insider trading! Now the cameraman, hairstylist, even the movie delivery boy could be your buddy for inside info," said one contributor.

SINGLE NEUROTIC FEAR "The truth is that there is a single neurotic fear that is driving many people to distraction against the Exchange, and it is this: if by chance a film is tracking badly on the Exchange, theatres won't book it, and the public won't go to it. That, in a nutshell, is what all the fuss is about," Moore said on The Wrap.

Veriana/Media Derivatives/ Trend Exchange has tried to be heard above the fearful row and has patiently tried to point out to anyone that would listen (in the Hollywood free-for-all) that all contracts on Trend Exchange will be based on opening weekend gross revenues of motion pictures rated by the MPAA, and that open on at least 600 screens in the US.

"Foreign investors can access TrendEx through three separate methods. These include, through an intermediary relationship, such as a US Futures Commission Merchant (FCM) or a foreign broker who has a relationship with a US FCM," Veriana said.

"In some cases, there will also be regulatory approval for international investors to access TrendEx through a direct trading platform or third party order, Independent Software Vendor (ISV) entry system. Participation in TrendEx through the two direct methods will differ country-by-country as countries have different access requirements."

"Generally, other countries will look to the CFTC for guidance and not pay very much attention to the fact thatCaMPAA's political contributions may cause a change in the law. Indeed, at least one jurisdiction has expressed interest in listing contracts if the US is unfriendly to them (I'd rather notCaname the jurisdiction at this time)," Jaycobs told Banker Middle East.

"I don't know how quickly emerging markets will pick this up. However, I can say that in 25 years of launching new markets, this one has the widest appeal and greatest chance of success that I've ever experienced."

2009 CPI Financial. All rights reserved.

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Publication:Banker Middle East
Date:Sep 5, 2010
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