  The use of CVA to cover credit risk is widely spread, but has its
limitations. Namely, dealers face the problem of the illiquidity of instruments
used for hedging it, hence forced to warehouse credit risk. As a result,
dealers tend to offer a limited OTC derivatives market to highly risky
counterparties. Consequently, those highly risky entities rarely have access to
hedging services precisely when they need them most. In this paper we propose a
method to overcome this limitation. We propose to extend the CVA risk-neutral
framework to compute an initial margin (IM) specific to each counterparty,
which depends on the credit quality of the entity at stake, transforming the
effective credit rating of a given netting set to AAA, regardless of the credit
rating of the counterparty. By transforming CVA requirement into IM ones, as
proposed in this paper, an institution could rely on the existing mechanisms
for posting and calling of IM, hence ensuring the operational viability of this
new form of managing warehoused risk. The main difference with the currently
standard framework is the creation of a Specific Initial Margin, that depends
in the credit rating of the counterparty and the characteristics of the netting
set in question. In this paper we propose a methodology for such transformation
in a sound manner, and hence this method overcomes some of the limitations of
the CVA framework.
