May 19, 2009
Jabcat live blogged the CFTC Public Meeting on movie box office futures from start to finish. Here is the minute-by-minute recap of a spirited and informative hearing that included six witnesses in favor of movie futures and two opposed.
GO TO BOTTOM OF PAGE FOR START OF MEETING
1:18 Chairman Gensler thanks and excuses the panel. The Commission is moving onto other business . . . ending the movie futures portion of the meeting. Soon thereafter, the meeting is adjourned.
1:17 Chairman Gensler asks about toy companies and retailers who have movie tie-ins. Panelists state that these parties make huge financial commitments and could use hedging.
1:12 Commissioner O’Malia asks about manipulation. Harbinson says that a union person could lead a strike or threaten one and this could manipulate the price of a futures contract on a movie. O’Malia stats he has three kids, needs some summer movie recommendations. Burns states KICK-ASS not for younger kinds. Moore suggests TWILIGHT: ECLIPSE!
1:05 Commissioner Chilton states that CFTC may not have insider trading rules but does have conflict of interest rules. Asks how we know movie futures will be used to hedge risk. Moore answers that history tells us studios will hedge risk, as they have hedged $14 billion of their movie costs over last 10 years and will do same with movie futures. Harbinson states that movie futures are different hedging tools than those currently used. More states that studios may change marketing for legitimate business reasons and will never do it just to try and manipulate movie futures contract prices.
1:02 Commissioner Sommers asks Burns how Lionsgate will use movie futures. Burns states that investors could buy movie futures on a film and then provide financing to Lionsgate for prints and advertising, e.g., with their financing of such hedged by the futures. Moore states that the notion of insider trading is a red herring because it is not prohibited in futures and Cantor was mistaken to raise the idea of a firewall to prevent such in their filing.
12:58 Commissioner Dunn commends passion of Harbinson and Moore. Says it is not CFTC job to decide whether these products will succeed or not, noting that 80% of new futures contracts end up failing because the market isn’t interested in trading them. Asks what will prevent one competitor from using movie futures to try and tank competitor movie being released at same time. Moore states that they can’t tank a film because the futures contract is based on millions of people going to the movie, not whether a competitor tries to sell it short. Burns states that shorting another studio’s film is a reportable event and “not even a remote possibility”.
12:51 Gensler asks about manipulation. Moore says only risk is if a studio wants to tank its own film. Gensler asks if the futures contract itself is susceptible to manipulation. Moore states box office number cannot be manipulated. Gensler asks if anyone knows if people are trading on OTC to hedge/short films. Burns states that people clearly short company stocks in advance of a film, but not aware of OTC trading. Harbinson calls the exchanges “bookies” and asks where the broader industry is to support this. Moore answers they are here, I represent the financing community and these exchanges will be used. Gensler states there is something different about this index which is on an individual movie, not oil as a whole. Burns states that each movie that comes out is like an individual company. A movie can do $200 million or more in total revenue.
12:46 Rob Swaggert, head of MDEX, attacks MPAA claims of gambling, futures tarrnishing the industry, etc.
12:41 Schuyler Moore, attorney in film financing, takes center stage and talks about massive withdrawal of outside financing from Hollywood and his desire to help Mr. Pisano and the Hollywood Guilds by bringing in financing for movies. Obviously, a strong supporter of movie futures, thinks studios should tie all financing to movie futures. Notes that they currently short and hedge their films through blind slate deals, split-rights deals, etc. and will embrace movie futures if approved. Believes studios are opposed because they fear if a movie is tracking badly on exchanges, theaters won’t book it. Moore answers that Hollywood Stock Exchange has traded movies on play money for years, giving same info and this and movie review sites have not caused theaters to refuse booking films that do bad on such sites. Gensler interrupts his passionate opening.
12:36 Michael Harbinson of IATSE, representing IATSE and DGA, rails against movie futures and about Wall Street vs. working men and women.
12:31 New Panel! Michael Burns of Lionsgate introduces himself.
12:28 Break for new panel of witnesses to come in.
12:27 Gensler asks if any hedging now done on OTC markets for box office receipts, which would be permitted since that market in unregulated, and if so why would they use movie futures. Hallren states he is unaware of such but confident movie futures will be used.
12:18 Commissioner O’Malia and Hallren discuss how box office numbers are reliable and used for many other industry purposes/deals. Jaycobs notes that box office numbers have not been the subject of litigation even though it is used in many deals and the industry is otherwise busy with litigation based on accounting.
12:12 Chilton asks about insiders at studios who some say want movie futures but won’t speak out in favor while MPAA and related organizations are opposed. Neuhauser acknowledges that studio insiders may not bet against their own movies but outside financing in amount of $14 billion comes from financiers that will. Jaycobs states that MPAA position has had a chilling effect on others who would state support. Chilton notes that outside financiers have not gone public in support and questions why. Hallren states that bankers who finance films don’t understand futures readily and that may be why they don’t publicly support now but will benefit. Pisano name drops that he has to go because he’s been invited by the Vice President to go to a state lunch for the President of Mexico at the White House. Pisano departs.
12:12 Commissioner O’Malia quotes ANIMAL HOUSE – “It’s not over til it’s over.” Huh?
12:06 Commissioner Chilton says he disagrees with Chairman Gensler that it’s a foregone conclusion that movie futures will be determined to be a commodity. Gensler interrupts and corrects that he said he thinks staff is likely to conclude such under the expansive language in the Act. Chilton asks Pisano if people involved with various revenue streams from movie (consumer products/home video/etc.) would have insider information and be excluded from trading movie futures. Chilton answers his own question and states concern about so many people having insider info. Then questions whether there is a legitimate hedging value if so many are insiders and can’t trade. Questions whether movie futures will be used on more than an occasional basis for hedging.
12:02 Commissioner Sommers asks about Rentrak. Jaycobs states that if studio reported numbers are not reliable, exchange could shift solely to electronically reported box office numbers from Rentrak. Exchanges decided to use studio reported numbers (which rely on Rentrak) because it was trying to work with studios and didn’t want to rely directly on Rentrak which might have a lower number because of non-reporting theaters.
11:57 Commissioner Dunn asks about gambling analogies and preventing insider trading. Jaycobs discusses efforts with CFTC staff to prevent insider trading. Pisano says it’s betting and people will win and lose, and insider trading rules are unwanted by studios and may be a nightmare to comply with. Neuhauser states it is a hedging vehicle. Hallren calls film investment risky but need futures as hedging vehicle to encourage investment
11:51 Gensler notes, in response to Pisano’s earlier comment, that staff is likely to recommend that movie futures do qualify as a commodity under the Act. But asks about the fact that box office revenue is not a price of an underlying product. Also notes he’s not sure whether that’s legally relevant. Jaycobs notes that CPI index isn’t owned by anybody and yet it is appropriate as a basis for a futures contract. Next Gensler asks about ability of small group of people to manipulate price of futures contract on an individual movie, which may be easier to do than manipulating other indexes, such as CPI, which are much broader. Jaycobs notes that box office on each movie is impacted by millions of people who go to see it and manipulating the actions of millions of people is not easy.
11:45 Commissioner O/Malia notes huge third party investment in film and wonders how to reconcile that with Pisano statement that studios are center of financing and they don’t want movie futures. Hallren explains blind slate studio film financing by third party financiers.
11:39 Commissioner Chilton mentions letters received by CFTC re movie futures. Nature of comments by Chilton now and earlier suggest Chilton is a skeptic, not sold on movie futures. Neuhauser notes many people involved in financing studio movies, not just studios and many depend on studios for distribution, etc. so hesitant to send letters to CFTC supporting movie futures while studios are publicly opposed, and before CFTC approval. Pisano acknowledges that studios might refer to movie futures to help market a film if the futures are trading long.
11:32 Commissioner Sommers asks Pisano about industry. Pisano notes that most independent films, which other panelists say would benefit from movie futures, won’t reach the 650 screens required for the Cantor Exchange DBOR. Sommers asks how blind investors will know what films to buy futures on. Hallren states that investment is blind up front but the investors will know down the line what the films are and can buy a futures contract.
11:26 Commissioner Dunn asks about third party financiers of film and their challenges. Hallren states that more financing, which has dried up, will come back to the industry if financing sources have an ability to hedge their investment. Pisano acknowledges that independent financers have trouble raising financing but notes that organization representing independent producers opposes movie futures and doesn’t believe futures will bring in new financing. Also states that he doesn’t want what happened to the mortgage industry to happen to the movie industry.
11:21 Gensler asks if these contracts would be used for hedging on more than an occasional basis. Hallren and Neuhauser both say yes and Neuhauser states that studio heads have told her so. Pisano says no. Jaycobs says yes. Hallren agrees that studios won’t short their own films, but film financiers will hedge and studios will go long. Neuhauser says Canadian prints and advertising financiers want to hedge. Pisano disagrees that others will use contracts to hedge. Gensler states that Pisano didn’t answer his question.
11:16 Hallren: Supports movie futures.
11:11 Neuhauser: Nothing notable. Supports movie futures as a hedging tool for various parties impacted by box office results.
11:06 Pisano: Movie futures have united a usually divided industry, i.e. studios, unions, exhibitors. Have used old fashion ways of hedging movie risks, e.g. split rights, presales, etc. Industry will never go short on a movie. Once done, if word gets out, no one will work with you again. Questions whether movie futures are a commodity, but his comments are not based on the Act and ignore other futures based on indexes, etc.
11:00 Jaycobs of Cantor Exchange goes first: Self-contradictory claims by MPAA, concludes they simply want to continue to control the movie industry. Key issue is whether a transparent public market is of value to industry. Final settlement values of Rentrak do not differ substantially from exhibitor reports, i.e. are reliable.
10:59 New panel: Richard Jacobs, President of Cantor Exchange, Bob Pisano of MPAA, Alice Neuhauser, Complete Rights Management, Clark Hallren Clear Scope Partners. Each has a written submission that will go up on website.
10:56 CFTC staffers Shilts and Berkowitz step away to make room for next witnesses as the funky background music begins to play.
10:52 Commissioner Chilton again asking whether movie futures fit into the definition of what a commodity is under the Act. Berkowitz notes that definition of commodity was intended as extremely broad.
10:47 Chairman Gensler again asks about economic purpose of contracts, noting that statutory language was deleted requiring such, but asks about whether hedging ability is required. Berkowitz states that hedging less important since repeal, but CFTC could still disapprove. Gensler asks if CFTC has ever read in an “economic purpose” test since repeal of the “economic purpose” language. No answer given. Shilts notes that under old language if some parties could use for hedging, that was sufficient.
10:28 Commissioner Chilton notes that CFTC would only gauge reliability of Rentrak numbers if there is an enforcement action. Shilts notes that CFTC still looking at reliability and reputation of Rentrak. Chilton asks CFTC General Counsel Berkowitz if there is an underlying commodity for movie futures. Berkowitz states the underlying commodity is the box office receipt number. Shilts pipes in it’s the same way for futures contracts based on real estate numbers or other index numbers. Also states that studios don’t have much control over how many people go to a movie, otherwise there would be no flops. Acknowledges studios have influence but does not mean they have power to manipulate cash settlement price of movie futures contracts. Influence vs. manipulation. Chilton asks again what the underlying commodity is and if there is one here that fits into the statute. Technical discussion with Berkowitz about definition of commodities under the Act.
10:21 Commissioner Sommers asks about other futures contracts based on 3rd party index/reports like Rentrak box office numbers which are key for movie futures. Shilts mentions other 3rd party indexes used to settle futures contracts in the real estate area, for example. Shilts notes that settlement of such futures contracts is based on the number put out by the 3rd party, with CFTC depending on reliability and reputation of the 3rd party, something they look into before approving the contract. Sommers interested in whether the 3rd party numbers are confirmable. Shilts notes that established indexes (e.g. Rentrak) are used and relied upon.
10:10 Commissioner Dunn questions Berkowitz and Shilts. Discussion about reliability of box office receipt numbers with Shilts. Rentrak, a 3rd party, reports the box office numbers. Shilts notes most futures contract fail, i.e. they don’t become popular in the market and that staff waits to see before devoting resources to enforcement, etc. Is the CFTC naïve about the likely interest in movie futures and should they be more proactive/ready to assign staff?
10: 05 Chairman Gensler asks CFTC General Counsel Dan Berkowitz about the law re economic purpose for hedging. Berkowitz noted that “public interest” test has been repealed, but law still requires Commission to find contracts do not violate the Commodity Exchange Act, which possibly implies the same? [His answer seems a bit unclear about law on this point.] Gensler asks if contracts are outside CFTC jurisdiction. Berkowitz states that if contracts are for future delivery they are within CFTC jurisdiction. Gensler states he thinks the contracts are within jurisdiction of CFTC (contrary to MPAA assertion). Berkowitz states that staff preliminarily concurs.
9:54 Opening comments by Rick Shilts, Director of Market Oversight for CFTC. Describes how MDEX Collared Binary Futures for movies work. Then describes how MDEX Collared Binary Options for movies work. Notes that statutory review for MDEX products ends June 7, 2010. Next, describes how Cantor Domestic Box Office Receipt futures for movies work. Then described comment letters on box office futures received by Commission and efforts that CFTC staff will take to ensure that contracts work properly if approved. Staff to consider hedging value of contracts, has not done so yet. Staff review of contracts ongoing.
9:50 Opening comments by Commissioner Scott O’Malia. Nothing noteworthy.
9:46 Opening comments by Commissioner Bart Chilton. Kudos to Cantor/MDEX for coming up with something new, novel and “cool”. Concern about what the underlying commodity is, viability of hedging value.
9:43 Opening comments by Commissioner Jill E. Sommers. Concerns about hedging, settling, manipulation, broader policy issues.
9:42 Opening comments by Commissioner Michael Dunn. Seems open-minded.
9:37 Chairman Gensler opening remarks. He notes that Commission will not vote today, just fact-finding. Record for meeting to stay open until May 26.
9:30 The august symbol of the CFTC has now appeared on screen of webcast. Background music continues.
9:00 Half hour until meeting starts. Anticipation building!
Meeting scheduled for 9:30-1:00 Eastern Daylight Time (EDT). All times are EDT.
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Excellent recap. If I may add, who brings props to an informational, fact-finding hearing? CFTC Commissioner Bart Chilton does.
You know Bart Chilton – the grandstanding, obviously biased individual who showed up yesterday, not to learn more about these products, not to listen objectively to the arguments for and against them in preparation for the commission’s decision next month, but instead who actually came prepared with his own arguments against these products, and spent all of his “face time” attempting to find any legal loophole in the CEA that will allow him the cover to vote against these products.
Bart Chilton could not have been more blatant about being in the pocket of the MPAA than if he showed up wearing a “Say NO to Box Office Futures” t-shirt.
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