Don't bet on betting on the box office.
A Senate committee dealt a big blow to the plans of two trading firms looking to create a box-office futures exchange that would allow the movie industry as well as investors to wager on movie ticket sales.
The setback comes as a surprise — and a victory for Hollywood — because federal regulators only in the last week had given the first stage of approval to the exchanges.
Included in the Wall Street Transparency and Accountability Act financial reform package, passed Wednesday by the Senate Agriculture Committee, is a provision banning futures trading on box office. The committee has regulatory oversight of the futures exchanges, which traditionally have traded in commodities such as corn, wheat and oil.
This year two financial firms, Wall Street trader Cantor Fitzgerald and Indiana start-up Media Derivatives, proposed a futures market as it applies to the box office performance of movies. The companies said that the derivatives could be swapped by movie investors who are looking for a hedge against the box office outcome of their movies, similar to the way farmers buy futures contracts to protect themselves against crop failure.
But the idea has been opposed by the Hollywood establishment, which fears the exchanges would be easy targets for manipulation and insider trading. In recent weeks the movie studios, joined by theater owners and at least one major labor union, have waged a lobbying campaign to scuttle the proposed exchanges.
Those efforts, however, looked doomed when the Commodities Future Trading Commission gave the first greenlights for the exchanges, paving the way for their launch by Cantor Fitzgerald and Media Derivatives. Now passage of the Senate Agriculture Committee's financial reform package casts doubt on the future of the exchanges.
A spokesman for Media Derivatives declined to comment on the committee action, while a Cantor Fitzgerald spokesman did not respond to a request for comment.
In a statement, Motion Picture Assn. of America President Bob Pisano said the plans for box-office exchanges are "based on a faulty understanding of the film business and could cause real financial harm to both the film industry and other Americans drawn in by an online gaming platform that could be easily manipulated."
On Thursday, Pisano is scheduled to testify along with other motion picture industry leaders before the House Subcommittee on General Farm Commodities and Risk Management, which is also investigating the proposed exchanges. Cantors Futures Exchange President Richard Jaycobs and Media Derivatives Chief Executive Robert Swagger are also set to testify.
The next step in the Senate is for the Transparency and Accountability Act to be merged with similar legislation proposed by the Senate Banking Committee. If the provision survives that, the House would either approve the Senate bill or create its own version. The White House has indicated that it wants to sign a financial reform bill by Memorial Day.
The Commodities Future Trading Commission, however, has not approved the contracts that would be used on the exchange. It has three months to do so, but it is not a guarantee as some commissioners have expressed doubts about the proposed exchanges.
The studios, in addition to arguing that the proposed markets could be manipulated, are also fearful they would create bad publicity for films before they reach theaters. The MPAA, the studios' chief lobbying group, teamed up with the National Assn. of Theater Owners, the Directors Guild of America and the Independent Film and Television Alliance to block the contracts.
One fear is that studios would use insider information to manipulate such an exchange.
Supporters of the proposed exchanges counter that futures contracts could bring more money into Hollywood at a time when the movie business is struggling with a shrinking DVD business and a decline in the private equity money that had poured into Hollywood over the last few years.