June 2, 2010
A Senate-House Conference Committee will spend June trying to meld two similar yet different financial reform bills into a single piece of legislation. Whether movie box office futures are banned in the merged bill is of prime importance to many, but could be a mere afterthought to the Committee which has much larger issues to resolve.
The Motion Picture Association of America (MPAA) is undoubtedly working the halls of Congress, contacting members of the Committee to ensure that a provision in the Senate bill which bans movie futures survives the cut. By now Cantor Fitzgerald and Veriana Networks (parent companies of the recently designated movie futures exchanges – Cantor Exchange and Trend Exchange/MDEX) undoubtedly realize that focusing their Washington efforts on the Commodity Futures Trading Commission (CFTC) simply isn’t good enough. One wonders if they’ve hired a DC lobbying firm and whether they have access to key members of Congress. Are they making personal contact with the Senators appointed to the Conference Committee and Representatives who are likely to join them?
More importantly, where do Conference Committee members/likely members stand? Considering the task before them, will movie box office futures attract their interest and attention, or be handled as a mere afterthought?
Let’s take a closer look.
First, it’s worth noting that only one of the twelve US Senators appointed to the Conference Committee (Patrick Leahy/Vermont), sent a letter to CFTC Chairman Gary Gensler expressing concern about box office futures. A similar letter was sent by five other Senators, but none of them were named to the Conference Committee.
Of course, Senator Blanche Lincoln (D) of Arkansas oversaw the Senate effort and supported the movie futures ban. She may not have sent a letter to the CFTC expressing an opinion, but she is on the Conference Committee with Senator Leahy, and will play a major role in its deliberations.
Less clear is how many of the thirteen Congressmen who sent letters to the CFTC expressing concern about movie futures [e.g. letter signed by ten Congressmen here] will end up on the Conference Committee, though if one report about the likely House Conference Committe members is correct, none of them will make it.
Will opponents of movie futures be outgunned on the Committee if a majority of Committee members did not send letters to the CFTC expressing concern? Not necessarily. Failure to express an opinion does not equal support. But all things being equal, Congressmen may be less likely to support a ban on movie futures since the House bill did not include one.
More importantly, at some point during Committee drafting a staff member or counsel will need to inquire whether the language banning box office futures should appear in the final bill (if Committee members don’t raise the issue on their own). Rep. Barney Frank, who will chair the Conference Committee, and Senator Lincoln are likely to be major players in this discussion. Although it’s clear that Lincoln wants to ban box office futures, it’s unclear whether Frank feels the same. It does seem likely, however, that Democrat Senators on the Committee will vote to include the ban, since it was in the Senate bill. Republican Senators on the Committee are unlikely to support the ban (or the final bill) since they voted against the Senate Bill when it passed their chamber. Whether Democrat Congressmen on the Committee support the movie futures ban is less certain. Some analysts believe the final bill as a whole will look more like the House version, not the Senate, which might give comfort to those rooting for box office futures.
Of course, the discussion about box office futures may get lumped into a larger discussion by the Committee about derivatives. The Senate bill is more restrictive when it comes to derivatives and many expect a grand compromise, with the Senate provisions regarding derivatives being dropped. This also may comfort those supporting movie futures. However, the movie futures ban is in a different section of the Senate Bill than much of the derivatives language and might survive a grand compromise in favor of the House language (or be considered separately as a result). In addition, the lobbying strength of the MPAA and its Hollywood allies is such that even if the derivatives restrictions in the Senate bill are removed, Hollywood may convince the Committee to retain the box office futures ban as a one-off favor to the industry.
All of this may be moot if the Committee is unsuccessful in efforts to draft a final bill. If the Committee doesn’t finish its work in time for Congress to vote on passage of a final bill before the July 4th congressional recess (and doesn’t extend its efforts), the failure will effectively kill financial reform.
One thing is absolutely certain. The month of June promises to be an exciting and pivotal one in the debate over movie box office futures.
{ 10 comments… read them below or add one }
It should be noted that the CFTC decision deadline for the TrendEx box office product submissions is June 7th.
The CFTC decision deadline for the Cantor Exchange box office product submission is June 28th.
thanks moviegeek23!
If the committee members reflect for a moment on the purpose of the financial reform bill and do their duty to ensure that each and every provision within it serves to address a weakness exposed by the financial crisis, there is no way the ban will be retained.
Furthermore, the provision was not included in the House Bill (one unaffected by the MPAA and Hollywood lobbyists) and the Senate Bill was voted against by most Republican Senators. This means that the provision is not even on the radar of priorities of anywhere near half of the all the parties involved in this process.
This does not mean it wont be retained, but it does convince me that if it survives in tact, it will be even more of a travesty for democratic process. Those senators and congressmen that put their names to (clearly MPAA scripted letters) should be ashamed of themselves: the letters are biased, show a poor grasp of the facts and no knowledge of due process – and how naive! it is like waving your hands in the air and publicly announcing that you are there for the taking by lobbyists.
As an aside, I am not sure how much more of Bob Pisano I can take: the guy should be a politician. No one can speak so much, make so many claims and allegations without actually substantiating anything that comes out of his mouth. ‘Gambling, manipulation and damaging to the industry’…blah blah blah…how many times Bob…?..but here’s an original idea, how about some examples? show me where you and the MPAA consulted derivatives/futures experts on if and how you could use these tools? show me where such people said they cant be used for hedging…show me why movie futures over all other aspects of pre-release buzz will make films fail…
Hey City Hall. What about fundamental fairness. Cantor and MDEX proposed firewalls. So this means that the companies that do not want their product subject to speculation now must assume cost and liability for a firewall? Cantor and MDEX profit by acting as the bookmaker, stick the companies with the tab and cost their money.
Realist…as with so many of the allegations thrown at Cantor and MDEX, yours is another over simplification of an issue that I am not sure anyone on the objectors side has taken a great deal of time to understand.
Firstly, you are right: it would be unfair if Cantor and MDEX could simply invent something that forced the studios to spend money, but that is not the case here: if the film studios do not want to use the product, they dont have to and if they dont, they wouldnt need to establish any firewalls – therefore no cost, no liability.
Sescondly, the firewalls actually only affect a small part of the studio. Look at the defintion of confidential/sensitive information required to be caught by the firewall. Its very narrow, and would not be hard to enforce. Many other users of futures products would consider outsourcing their futures trading to an expert in any event – God forbid the MPAA and studios could think about positive ways to use the product.
Thirdly, all of the main studios already sit under listed parent companies. Therefore they should all have policies in place that they enforce with respect to confidential and price sensitive information relating to that listed stock. Extending a policy to cover something new is not going to cripple the studios or be onerous – unless sthey have been failing in their existing duties…
I am aware form other forums that one of the real reasons the MPAA et al object is that the studios are posessive of their movie titles and have some huge problem with the concept people might make money off their films. It shows, but they cant admit this publically because the law does not consider this a reason to ban futures contracts.
City Hall. Thanks for the comments. Are you saying that the studios only need to set up firewalls if they themselves are trading? If they elect not to trade, are employees with information that would be contemplated to be firewalled then free to act on it individually or with others? If such is not the case, then the creation of these exchanges places a financial and legal burden on an unwilling party. It doesn’t make a difference whether extending a policy to cover more ground is a minor cost or not. The simple act of an in-house legal review of existing confidentiality policy has a cost associated with it. It is an additional burden with a quantifiable cost and presumably brings additional liability to a disinterested party. And for whose benefit? Cantor and MDEX. Whether a blockbuster or a bomb, inside information (however you define it) has the capacity to move a contract related to a specific film far more than a studios stock price. Accordingly, that information becomes of far greater value. To the extent that any of that information is subject to existing confidentiality policy, I’d argue that by necessity a studio will have to devote greater resources to protect an asset whose value has grown geometrically. Again, an additional burden for a disinterested party while Cantor and MDEX make money off of both sides of the bet.
The real irony is that nobody is focused on the fact that the proponents of this alchemy are really only Cantor, MDEX and their extended family. Other than the two principals, the only people they could muster to testify is the Nutty Professor who “invented” these exchanges the way Al Gore invented the Internet. Burns from Lionsgate is the guy who sold Cantor the model on which it built its product; Neuhauser, a lightweight who is promised a seat on MDEX’s board and Hallren, another advisor. Where are all of these investors clamoring to invest in films? Where’s the pent-up demand?
Finally, you almost have to laugh at the irony of the Wall Street guys noting that the motion picture industry has suffered in the recession and could be reinvigorated by the introduction of new, exotic and artfully applied financial instruments…… somehow ignoring that they were largely responsible for creating the recession to begin with by using new, exotic and artfully applied financial instruments.
Thanks for the reply Realist.
As I read the rules and interpret the testimonies, if a studio has no interest in hedging its position using these products it is not required to set up a firewall. Why would it? The concept behind a firewall/information barrier is that certain information that the studio (and others) have access to first can be abused for great advantage on an exchange by the studio – for instance, the guy at the studio who collects the box office receipts from Rentrak in real time, could instantly look at the exchange and move the studios position. The firewall would seperate those with critical info and those trading on the studios behalf – this concept is not new or revolutionary, similar rules exist in other forms of securities trading: for instance a company exec can not trade a companies stock when he holds undisclosed info.
Those who do have such information (either through their role with the studio or otherwise) can not use it in their personal capacity either – but critically from the angle you are coming at this, the studio would not be liable for a rogue employee who decides to break the law. Which seems correct: you can not ban something just because some in society prefer not to abide by the law with regards to its use, but the correct thing for the law to do is identify where blame should lie for such misuse. The example of the company exec, would not hold the compnay to account if he misused it – this is not a company internal policy he is breaking, this is a legal one.
As for the question of where’s the pent up demand, I disagree on 2 points: i) These exchanges are complicated, they introduce a new financial product to an area unused to such. These things take time to understand, as is evident in every industry sector where futures contracts have been introduced which took a while to appreciate the large beenfits such products could bring to their business: MDEX and Cantor have probably been too busy fighting for their lives to go on the road exploring the possibilities with studios. 2) As people understand better, more than just Lionsgate are coming forward in support: academics, downstream rights buyers, traders, film financiers etc. Notably these are people who have no reason to fear upsetting the MPAA: its quite telling that those who did support the concept at the studios in the 2 years of development have been silenced and now fear coming forward. These people must exist: No organisation like Cantor is going to bankroll a project without marketing testing: they are not idiots.
Clearly from your tone, we have different attitudes to financial innovation and the financial sector generally. I can’t agree with branding all things new and untested as ‘alchemy’ and gambling or instantly attributing the cause of the financial crash to people like MDEX and Cantor. Exchange traded, fully margined, futures contracts (which these are) did not contribute to the financial crisis at all – few people understand this point and the very significant differences between different types of financial product. These contracts go way above and beyond even the safeguards recommended in the proposed financial reform bill, but the general attitude is, hey we cant be bothered to try and understand that, so lets label them gambling. The fact is the film industry is suffering from a shortage of finance, not just because of the recession but because funding into the studio system is a murky, non-transparent business where third parties do not receive a level playing field or access to open book accounting that an investor of that scale would expect to receive in any other industry.
My biggest issue with this is not that these exchanges are perfect but that so much coming out of the MPAA is disingenuous. These exchanges may have potential: but the MPAA have not explored it. They have objected from the moment they heard about them (about 12 months after the rest of us) and never attempted to meet with these guys to craft a more suitable product or cooperate or engage investment banks/derivatives experts to see how they could use. If i was a shareholder in a studio i would be pretty worried about executives taking such a narrow minded attitude towards something that could hedge my risk on the next underperforming blockbuster.
Thanks for your insights. If I understand you correctly, those persons considered insiders and subject to the firewall, are only so classified if their company is actually engaged in trading. If the studio was not engaged in trading, then those employees have no regulatory prohibition on using “insider” information. If that’s the case, the guy who looks at the Rentrak data in real time could move his position or another’s position as there is no firewall or prohibition. That doesn’t exactly inspire confidence. There is clearly a recognized advantage to the use of “insider” information. But the determining factor of what constitutes insider information is an individual studios participation in trading. That seems problematic to me. Am I missing something here?
City Hall: What about Rentrak and/or its employees? Are they prohibited under law from using the information they gather to trade? If they’re not do you see a problem?
Yes you are missing something. Insider/material information is defined by the rules. And the information remains so categorised whether or not the studio to who that title belongs is trading. Therfore a holder of that info is an insider come what may. Whoever uses that info (and however they got it) to trade to their advantage is breaching the rules – this is how insider info works univerally. The studios (because they in part generate that info and are the natural holders of that info) have to estblish info barriers upfront before they can even participate. An individuals ability to legally use the info is not linked back to the existence or otherwise of an info barrier at the studio, so if you work at a studio and get early gross igures or pre-release marketing budget numbers and strategy, you can not act on that info in your personal capacity regardless of whether the studio is participating or has an info barrier.
Rentrak employees are not allowed to participate. When you seek clearance to use the exchange one of several formal declarations you have to make is that you dont work for Rentrak or a number of other similar bodies.
And I should clarify, it wont be as simple as making a false declaration and watching the profits roll in. All securities markets including these have very sophisticated mechanisms to obeserve trading patterns, price manipulation and relevant news. So if a film has surprisingly underpeformed (and you get the news through your job at Rentrak before the info is released to the public) these systems will be able to identify and link trading activities to such news. And you will likely be investigaed.
Hopefully you are slowly seeing that this isnt something thought up overnight. MDEX and antor have been in dialogue with the CFTC for nearly 2 years – the CFTC have pretty stringent tests that ask all the questions you are asking. If they were not satisfied in how this issues are addressed they would not have designated them as markets, if they are not satisifed they do not pass the contract specific tests they wont approve the contracts.