In the event of a default, the Central Counterparty (CCP) steps in to ensure the obligations of the contract are met. This is achieved not by the CCP directly paying the losses on behalf of the defaulter, but by replacing the defaulting counterparty of the contract with a new counterparty through an auction process. This is the first step taken by the CCP to manage the default situation. The auction process allows the CCP to transfer the risk to another party willing to take on the contract, thereby ensuring the continuity of the contract and minimizing the impact of the default.

Choice A is incorrect. Increasing the variation margin is not the initial step taken by a central counterparty (CCP) to manage a default situation. Variation margin refers to payments made or received due to changes in the price of the underlying asset, and it's typically adjusted daily. However, in case of an expected default, simply increasing this margin would not be sufficient as it does not directly address the risk of non-fulfillment of obligations.

Choice C is incorrect. Requiring additional initial margin may help mitigate future risks but it's not an immediate action taken by CCPs when a party defaults on its obligations. The initial margin serves as collateral to cover potential future exposure arising from price changes, but once a default has occurred, requiring more upfront collateral won't rectify the current situation.

Choice D is incorrect. Loss mutualizing involves spreading out losses among all members of CCP which can be considered as one way to manage defaults but it's usually seen as a last resort measure rather than an initial step in managing defaults.