Fear that it may expose studios to speculative harm

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Tina Fey and Steve Carell are shown in a scene from “Date Night.’’
By Todd Shields

WASHINGTON — Regulators approved the first futures market based on movie box-office returns yesterday over the concern of lawmakers and Hollywood executives that the exchange may expose studios to speculative harm.

The Commodity Futures Trading Commission voted 5-0 to let Veriana Networks Inc.’s Media Derivatives Inc. unit open a market for professional traders to make financial bets on how well a new movie will do in ticket sales.

A plan by Cantor Fitzgerald LP to create a market that includes retail investors is pending before the commission.

Media Derivatives’ market, to be called Trend Exchange, “will help better manage economic uncertainty and financial volatility,’’ Rob Swagger, chief executive of the Scottsdale, Ariz.-based company, said in an e-mailed statement after the vote.

Professionals would use the market to hedge risk to movie investments, from “catastrophic events such as the World Trade Center bombing, to climate events such as severe snowstorms,’’ the company said.

Media Derivatives told the commission its proposed market could transfer financial risk from producers, studios and theaters to “a community of speculators willing to assume these risks’’ in return for being paid a premium.

The market plans to begin trading in the third quarter, Stephanie DiIorio, a company spokeswoman, said before the vote.

The CFTC must still approve the type of contracts to be dealt before Trend Exchange can begin. The company has said its first product will center on opening-weekend box office.

Product approval is “a very different question’’ from exchange approval and raises “significant concerns,’’ CFTC Commissioner Bart Chilton said in an e-mailed statement. He said he had “reluctantly’’ concurred in yesterday’s vote.

“I’m worried about manipulation,’’ Chilton said in an interview on Bloomberg Television.

“We have serious concerns regarding the trading of media contracts and we support a very thorough review of all of these first-of-a-kind products,’’ CFTC Commissioner Scott O’Malia said in an e-mailed statement.

Hollywood studios that participate by hedging their films’ prospects will doom ticket sales, said Peter Guber, chairman and CEO of independent production company Mandalay Pictures LLC.

“The word will get out in three seconds and the picture will be a complete catastrophe,’’ said Guber, who was chairman and CEO of Sony Pictures Entertainment in the early 1990s.

Key members of Congress also expressed doubts.

Senator Blanche Lincoln, an Arkansas Democrat, added language yesterday banning trade in movie futures to a broader derivatives bill she is writing. Lincoln is chairman of the Agriculture Committee that oversees the commodity commission.

Senate Judiciary Committee members warned CFTC Chairman Gary Gensler in a letter Thursday of the risk of “creating perverse incentives for movie failure that may undermine the integrity of the industry.’’

Activity on the exchanges would bring about “risky and manipulative’’ behavior, said the letter from Senators Patrick Leahy, Democrat of Vermont, who heads the Judiciary Committee, and Orrin Hatch, a Utah Republican.

“I just don’t know if this is something that makes sense,’’ said Representative Collin Peterson, Democrat of Minnesota and chairman of the House Agriculture Committee, in a conference call with reporters.

“A kernel of wheat is a kernel of wheat,’’ said Peterson, whose committee oversees the CFTC. “Movies are very subjective.’’

He said he had “significant questions about this whole idea.’’