Hello silverado_slim:

My further comments in italics.

To buy, you have to have the margin % to cover a portion of the cost of doing the eventual buying of the product.

NO. FUTURES MARKETS ARE NOT INTENDED TO TRANSFER PHYSICAL UNDERLYING PRODUCT. THE INITIAL MARGIN IS COLLATERAL AGAINST THE NEXT DAY'S MARK-TO-MARKET VARIATION MARGIN CALL.

While the futures markets are not intended to transfer physical underlying product (they are intended to manage/transfer risk and provide price discovery), they nonetheless are (of necessity) built on the underlying concept of the future delivery of physical product. About 4% of contracts are actually carried through to the delivery phase (according to one source - I suspect it varies widely from market to market and from commodity to commodity). Because of this foundation, initial margin of the purchaser is indeed the "earnest" or initial payment to cover part of the cost of the eventual buying of the commodity. There may be several perspectives that one can look at this margin with, but it is a basic fundamental that the initial margin is an "earnest" toward paying for the delivery of the product.

Now, as I recall, the Hunt brothers used that additional cash in the futures accounts to go out and buy more futures.

THAT WAS INDEED WHAT THEY DID.

I think I understand why the margin percentage was increased...

THE COMEX BOARD INCREASED THE MARGIN TO KEEP PACE WITH THE INCREASED VOLATILITY OF THE PRICE OF SILVER. THAT IS THEIR RESPONSIBILITY UNDER THE FEDERAL REGULATIONS AND THE EXCHANGE BY-LAWS.

The clearing house companies were running out of funds to cover the losses of some of the (probably bankrupt) sellers of the contracts if (or when) they could not deliver the goods.

NO. THE CUSTOMERS' DAILY CASH MARGIN COVERS THE DAILY MARKS AND POSITIONS ARE LIQUIDATED IN THE EVENT OF A DEFAULT BY A CUSTOMER.

There are two kinds of "defaults": The failure to cover the margin requirement (which is what I believe you are describing) and the failure to physically deliver the product to the purchaser of the contract if it is let stand for delivery (which is what I was talking about). One is a failure prior to the delivery phase, the other is a failure of the supplier in the delivery phase.

In both cases, there are circumstances where the clearing house could be forced to take a monetary loss over and above the margins available to cover them. Unusual circumstances, yes, but circumstances that were in force during the Hunt brothers episode.

Is there any equivalent (self-limiting type) mechanism that is (or should be) triggered by shorts (or futures sellers) trying to manufacture a "virtual oversupply" of a product? Does there need to be?

THE MARGIN RULES ARE ENTIRELY SYMMETRICAL. THERE IS NO DISTINCTION BETWEEN LONGS AND SHORTS.

So when the margin requirements were changed, were they changed symmetrically (same new requirements for the longs and the shorts) in the Hunt brothers case? Are they symmetrical now? Is there any guarantee that they will stay symmetrical?

Guess why I just might be scared to enter into futures trading!