The MPAA continues to argue against the establishment of a market for box office contracts. Here’s MPAA Interim CEO Bob Pisano’s letter to Commodity Futures Trading Commission chairman Gary Gensler, who will make a decision shortly on petitions by Media Derivates Inc. and Cantor Fitzgerald to start trading on box office contracts, beginning with the summer season entry Iron Man 2.
MOTION PICTURE ASSOCIATION OF AMERICA, INC.
1600 I Street NW
Washington, D.C. 20006
Thursday, April 15, 2010
A. Robert Pisano
Interim Chief Executive Officer
Dear Chairman Gensler:
Thank you for meeting with me and my colleagues this afternoon. We think it may be helpful to follow up with the following points.
We appreciate that the immediate decision facing the Commission is acting on the application of Media Derivatives, Inc. (MDEX) for designation as a contract market. As we said, however, we do not believe the Commission should separate that question from the type of trading MDEX proposes, in particular given the novel, complex questions it presents. Indeed, even MDEX has joined these questions; the MDEX DCM proposal is predicated on trading in box office receipts futures contracts, not other more traditional contracts, and not as an abstract request to establish itself as a futures market.
Nonetheless, examining the DCM proposal alone, we contend that the Commission should deny it, as it clearly has discretion to do under the statute, because if fails to satisfy two key designation criteria, criterion 2 and criterion 8.
MDEX has no way to determine the legitimacy of futures or option pricing based on motion picture box office receipts. The application fails to satisfy designation criterion 2, Prevention of Market Manipulation on several fronts: There is no natural price competition between longs and shorts in an underlying commercial market. There is cash market pricing, no additional months of futures market pricing, and no actual cash market transactions against which to measure the legitimacy of the futures price.
The potential box office receipts for a motion picture can be materially affected by individual industry participants in a variety of different ways that would be exceedingly difficult for MDEX to detect. Exhibitors who contribute to the Rentrak numbers could, either intentionally or accidentally, misreport their data. A distributor could determine within the four-week period preceding a motion picture’s release to reduce or increase the number of theaters that would show the motion picture on the opening weekend.
A distributor for a variety of reasons could determine to substantially reduce or expand its marketing budget, which can materially affect opening weekend box office receipts. A major exhibitor could determine to show the motion picture on smaller or larger screens, which can materially affect audience interest and capacity. MDEX has no effective means to detect or prevent such conduct or to determine whether it was undertaken for valid business reasons rather than to manipulate futures prices.
In addition, MDEX cannot demonstrate that it meets Designation Criterion 8, Ability to Obtain Information. MDEX has no ability to obtain information that would provide a benchmark for legitimate futures pricing. MDEX states that its ability to prevent manipulation will be based on the requirement that studios disclose their proprietary information regarding box office receipts where the exchange believes such information is necessary to investigate or deter manipulation; however it has no authority to compel the motion picture industry or other private institutions to disclose any proprietary information and no such authority can be conferred on it by or pursuant to the designation of MDEX as a DCM. Studios have always carefully guarded this highly confidential and sensitive information.
With respect to the trading for which MDEX seeks DCM approval, the Commission has authority to deny a proposed futures contract that fails to satisfy the public interest criteria set forth in Section 3(a) of the CEA – price discovery and hedging. The proposed contracts on motion picture box office receipts do not fulfill either public interest. There is no dispute that they do not fulfill a price discovery function.
The record before the Commission is clear that the contracts would never be used for hedging. Underscoring this is the fact that the applicants seek to impose a firewall as a prerequisite for industry insiders to trade the contract. Such a firewall would defeat any informed or legitimate hedging use of the contract and therefore defeats any reasonable contention that a contract would be used for hedging. We respectfully believe that to satisfy the public interest, the statute contemplates something more than a bare, abstract argument for hedging, especially where, as here, the record of any is clear that the contract would not be used for hedging.
Consistent with the foregoing, we believe the Commission can and should conclude that where a contract does not satisfy the public interest criteria and instead, like the contracts at issue here, would be used only for speculative wagers on the performance of a particular product, approval of a contract would be inconsistent with the CEA’s public interests and with the anti-gambling proscriptions of the Wire Act, 18 U.S.C. § 1084. Approval is especially problematic where the product and the purported commodity are subject to the substantial control of a relatively small group of industry insiders, for example, studios and exhibitor chains.
We also respectfully submit that where the public interests factors are not met, the Commission’s discretion should also be informed and guided by the industry’s concerns that these contracts can actually be harmful to the economics of the motion picture industry.
As we have explained in prior submissions as well as in our meeting today, these contracts could, among other harms, damage the reputation of a motion picture before the public has even seen it, foist upon the industry a need to develop expensive compliance regimes with respect to employee involvements with such contacts, and potentially expose studios to new types of legal claims, such as if an estimate of box office receipts proved erroneous (even where such inaccuracies were the product of mere mistake).
Again, we very much appreciate the time you and the Commission Staff spent with us today. We will be happy to answer any questions and provide further information.
With best personal regards, I am
A. Robert Pisano,
Interim Chief Executive Officer
Motion Picture Association of America, Inc.