US CFTC to decide on box office-based derivatives

WASHINGTON, April 16 (Reuters) - A decision on whether traders can speculate on the success of movies moved closer on Friday when the top U.S. futures regulator approved a new market that could one day be used to trade box-office receipts.

The ruling under the Commodity Exchange Act is the first hurdle Media Derivatives Inc needed to begin trading options or futures contracts. The CFTC said it is still considering whether to allow the firm to offer a contract tied to the box office receipts of a movie, but commissioners so far do not appear convinced the contracts will pass muster.

"At this point in time, I have not heard any arguments to persuade me that 'movie futures' generally can overcome some fundamental design flaws," said CFTC Commissioner Bart Chilton.

Chilton and fellow CFTC Commissioners Scott O'Malia and Jill Sommers said in statements the contracts must show they are useful commercial hedging tools and free from fraud and manipulation.

O'Malia and Sommers said in a joint statement they had "serious concerns regarding the trading of media contracts."

The CFTC, which oversees the U.S. futures markets, has until June 7 to make a decision on Media Derivatives's box office return contracts.

"We believe that our products, designed in partnership with the broad industry constituency, will help better manage economic uncertainty and financial volatility, thus enhancing opportunities for success," said Robert Swagger, chief executive of Media Derivatives.

"The regulatory review and oversight of the CFTC is rigorous --and necessary to inform and protect all participants in these markets," he said. Media Derivatives will operate under the name The Trend Exchange.

The regulatory body also is considering a separate request from the broker dealer Cantor Fitzgerald, which is expected later this month.

Here is how the movie futures could work: if the expected box office revenue of a film is $200 million, an investor could buy a futures contract for $200 and, if the movie does better than expected, could sell at a higher price, making a profit.

The Motion Picture Association of America contends trading movie futures would damage the reputation and integrity of the industry and make the box office susceptible to potential market manipulation.

A form of betting on the success and failure of box-office flicks has been around for more than a decade. In 1996, a website called The Hollywood Stock Exchange was started where participants could invest fake dollars on box office outcomes. A division of Cantor Fitzgerald bought the site in 2001. (Editing by David Gregorio)