By Michael Mackenzie and Tom Braithwaite in New York

The Federal Reserve Bank of New York plans to start demanding collateral from Wall Street dealers on trades that involve mortgage-backed securities as part of a tougher risk management stance in the wake of the demise of MF Global.

The Fed privately told dealers on Tuesday that mortgage securities sold to the central bank under its current buy-back programme will require the posting of initial margin of 2.5 per cent and daily variation margin from Friday.

Margin in this case refers to the deposit sellers will have to make with the Fed until the securities are delivered and the trade is settled. This protects the Fed in case a dealer runs into trouble.

The move comes after last month?s bankruptcy of MF Global, the broker-dealer, which was a primary dealer and a counterparty to the New York Fed in various bond market dealings.

While the Fed did not incur any losses from its dealings with MF Global, the move to institute margin on mortgage securities trading, which can often take several weeks to settle, is an effort to make sure the central bank is protected.

?The Federal Reserve Bank of New York informed its primary dealers today that it will require dealers to margin against their outstanding agency MBS forward transactions with the NY Fed,? said the New York Fed in a statement. ?Dealers are required to post collateral in a number of other types of operations with the NY Fed.?

The Fed began buying hundreds of billions of dollars of mortgage-backed securities in 2008 as part of its attempt to stimulate the economy. Officials have since assessed whether improvements could be made to the mechanics of the programme.

The demand for margin will raise the cost of trading and that may result in less selling of mortgages by dealers to the central bank, according to dealers.

At its September policy meeting, the Fed decided to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities into agency mortgage-backed securities. Since September, the New York Fed has purchased $32bn of MBS and over the next month starting from this week is set to buy approximately $28bn.

Raising risk management standards comes as Fed officials including Ben Bernanke have not ruled out launching another round of quantitative easing that involves large scale purchases of mortgages.

? The Financial Times Limited 2011