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Robert Swagger, CEO of the Trend Exchange, gave a press conference detailing his progress — or lack of it — in swaying DC politicians to remove movie futures exchanges from the financial reform legislation that is expected to be signed into law later this year. After gaining approval last week to launch from the Commodity Futures Trade Commission, Swagger said he would head to Washington to either remove the futures trading from the legislation, or else grandfather Trend Exchange because it had been approved by the appropriate regulatory body. He said at the time he feared it would be an uphill battle. It was worse than he’d envisioned. With a vote looming later this week, Swagger not only had trouble swaying opinion, he had trouble even getting access to staffers of representatives weighing the legislation. While all the signatory studios and showbiz guilds lined up against trading futures based on box office performance, Swagger blamed the MPAA–and specifically interim head Bob Pisano–for being unable to launch his new business. He claimed Pisano is hiding behind anti-trust provisions and wielding tremendous lobbying clout to crush a small entrepreneur. Swagger left open the option of a legal battle over what he termed damaging misrepresentations made by Pisano. Then, Swagger took some shots of his own, claiming that DC pols were afraid go to against Pisano’s “Chicken Little” agenda. “The market should decide if these are valuable products or not, not the interim head of the MPAA,” Swagger said.
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May this idea go down in flames. If he/others want to gamble on box office, let them go to Vegas, baby… but don’t let this sham hide behind the legal protection afforded by government faux regulation. Films are not measurable commodities. The fact that this scheme has gotten this far is already absurd.
Here’s an idea; how about we leave Hollywood to the creative people and you irritating little Wall Street twerps get on your private jets and go back east and never come back?
Or are you not content enough having destroyed the economy and housing market and looking for more industries to mess up with your incompetence?
they may be irritating but without wall street there is no hollywood. what do you think finances the parent companies of all the studios?
AMT, you’re right. Films are not measurable commodities. But box office receipts are very much a measurable commodity.
Box office futures are based on an actual economic number widely accepted within the industry, and used contractually in support of many revenue streams (theater revenue from distributors, merchandising, PPV, cable, DVD and blue ray sales, international distribution, talent compensation, etc.).
Economic value is directly tied to these numbers. These products provide parties with exposure to box office results (film financiers, studio distribution and advertising, theater chains, promotion and merchandising, downstream distribution partners like PPV, cable, DVD and blue-ray sales) an opportunity to “hedge” their exposure in an exchange-traded, centrally-cleared, federally-regulated, transparent marketplace.
Again, you make the same mistake as many others arguing against these instruments. The recent financial meltdown was caused by over-the-counter (OTC) derivatives (swaps, housing), and not by any product traded on any federally-regulated derivatives exchange.
Excellent post.
If Mr. Swagger expects to be grandfathered in then he needs to hire a new legal team. Statutory law trumps administrative regulations any day of the week.
The industry really shot itself in the foot on this one.
Risk management is the #1 topic of discussion in the world of finance right now and is especially critical in the production of motion pictures and the continued survival of the industry.
What the MPAA has done is make it so if it ever wants to hedge the risk of its risk as it undoubtedly is going to need to do and soon, its going to have to go back to Congress for approval to do so.
Not the brightest of moves.
The reason the instruments “blow-up” as it were is because they see
returns being log-normally distributed which they aren’t.
I’m all for risk management in Hollywood but I think having a movie futures exchange is not an effective way to do it. Don’t studios and investors already hedge their risk by partnering up with each other, and dividing up distribution territories and other ancillary revenues? Essentially the exchange will turn into a gambling operation for betting on B.O receipts with most participants having little to do with the movie industry. There will be wide erratic price swings and people with some kind of inside info could benefit greatly while most will lose their shirt (much like the current options exchange in the equity and commodity markets). I realize there are lots of variables in determining a movie’s box office success, but that’s the business we’re in, and should just accept that. Making profitable movies will never be a process that can be perfected with some financial formula because a successful movie usually has some intangible quality that can’t be quantified. The cookie cutter approach of sequels and comic book properties by no means guarantees profits as some recent releases this year have proven.
Uh huh. And so, Aucociscokid, why not answer these questions:
How does the “exchange” create a hedge for a financier when you can’t trade “futures” until a few weeks prior to release, long after the financier has made his decision to invest in the picture?
How do you “hedge” against the damage that comes when the public finds out that after you’ve seen your finished picture before any one else, you bet against it?
Easy.
Financiers often finance “slates” of films, usually in groups of 10 or so. This financing is arranged 2-3 years prior to the movies being produced, so they are not specifically financing any movie. The 10 movies in the slate usually are defined by generic criteria, such as: a number of movies with an A-list star, a number of movies with a certain budget, a number of movies at a certain level of theater release (i.e. – 2000 theaters opening weekend), a number of movies directed by an A-list director, etc.
So the studio needs to identify, along the way, the 10 movies that will satisfy all of the criteria in the “slate” deal with the financier.
Now, how do you think the slate financier for Warner Brothers felt when they were informed a couple months ago that one of their movies in the slate deal that they financed was Jonah Hex?! Major stars (Megan Fox, John Malkovich, Josh Brolin), large budget, and a big release (2800 theaters), and all the pre-release buzz indicated that the movie was in trouble.
Don’t you think that the financier should have a venue where they can at least try to mitigate this risk? Do you think that the current structure, where the studios hold all the cards, is right?
Here’s a financier who thinks he’s financing a star-vehicle movie, and is given the shaft by being told late in the game that their financing went towards a piece of junk like Jonah Hex. Now do you realize why the #1 topic in Hollywood is film financing (#1 topic recently at Cannes), and why film financing is drying up? The studios have the book stacked completely in their favor, and banks and individual investors are tired of getting screwed over.
Certainly co-financing is one way a studio hedges risk. Underscore “studio.” What this more often amounts to is a financing entity essentially renting the studio’s distribution. In such a scenario, it leaves the financing entity still exposed. There are in fact many ways of hedging the risk of motion pictures. It really has to be customized. You want to hedge the risk of a slate in a different manner than the way you do individual films.
In Cantor’s proposed exchange, trading starts 6 monnths before release which would be an effective hedge.
Studios short their productions all the time now: What do you think co-financing is?
I’m not saying the Cantor and Veriana plans are the best.
Their flaw is there is no deliverable, so risk really isn’t being hedged.
What I am saying, however, is the course the industry has taken effectively cuts off it being able to hedge the risk of its productions under any circumstances, unless it wants to go back to Congress for permission to do so effectively putting its fate in the hands of that body.
If one looks at it, most, if not all, products owe their availablity to the consumer because of their manufacturer’s ability to hedge risk on an exchange.
Insider trading does not exist in the futures market.
Trading depends, even benefits, on asymmetrical information.
Prices of a movie contract can only swing as much as BO does.
We’re not taking about making motion pictures here, but rather the financing of them which is completely formulaic.
Financial returns of a motion picture are a stable Paretian distribution.
Which is not to say they’re predictable which is precisely the reason for hedging risk.
The only thing hedging risk is gong to do is facilitate financing.
By itself, its not going to make a movie any more or less profitable than it ordinarily would or wouldn’t be.
You know what the most stable financial markets out there are?
The futures markets.
Because they trade on margin, go through a clearinghouse, are traded by matched counterparties, etc. there has never been and probably never will be any systemic risk associated with them.
Well said.