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Hedge accounting | 12 Months Ended
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Dec. 31, 2022
Hedge Accounting |
Hedge accounting | Note 7 - Hedge accounting There are three types of hedge relations: Fair value hedge, Cash flow hedge and Hedge of net investment in foreign operations. In hedge accounting, the groups of risk factors measured by ITAÚ UNIBANCO HOLDING are:
• |  | Interest Rate: Risk of loss in transactions subject to interest rate variations.
• |  | Currency: Risk of loss in transactions subject to foreign exchange variation.
The structure of risk limits is extended to the risk factor level, where specific limits aim at improving the monitoring and understanding process, as well as avoiding concentration of these risks. The structures designed for interest rate and exchange rate categories take into account total risk when there are compatible hedging instruments. In certain cases, management may decide to hedge a risk for the risk factor term and limit of the hedging instrument. The other risk factors hedged by the institution are shown in Note 32. To protect cash flows and fair value of instruments designated as hedged items, ITAÚ UNIBANCO HOLDING uses derivative financial instruments and financial assets. Currently Futures Contracts, Options, NDF (Non Deliverable Forwards), Forwards, Swaps and Financial Assets are used. ITAÚ UNIBANCO HOLDING manages risks through the economic relationship between hedging instruments and hedged items, where the expectation is that these instruments will move in opposite directions and in the same proportion, with the purpose of neutralizing risk factors. The designated coverage ratio is always 100% of the risk factor eligible for coverage. Sources of ineffectiveness are in general related to the counterparty’s credit risk and possible mismatches of terms between the hedging instrument and the hedged item. a) Cash flow hedge The cash flow hedge strategies of ITAÚ UNIBANCO HOLDING consist of hedging exposure to variations in cash flows, in interest payment and currency exposure which are attributable to changes in interest rates on recognized and unrecognized assets and liabilities. ITAÚ UNIBANCO HOLDING applies cash flow hedge strategies as follows: Interest rate risks:
• |  | Hedge of time deposits and repurchase agreements: to hedge fluctuations in cash flows of interest payments resulting from changes in the DI interest rate, through futures contracts.
• |  | Hedge of asset transactions: to hedge fluctuations in cash flows of interest receipts resulting from changes in the DI rate, through futures contracts.
• |  | Hedge of assets denominated in UF*: to hedge fluctuations in cash flows of interest receipts resulting from changes in the UF*, through swap contracts.
• |  | Hedge of Funding: to hedge fluctuations in cash flows of interest payments resulting from changes in the TPM* rate, through swap contracts.
• |  | Hedge of loan operations: to hedge fluctuations in cash flows of interest receipts resulting from changes in the TPM* rate, through swap contracts.
• |  | Hedge of repurchase agreements: to hedge fluctuations in cash flows of interest received from changes in Selic (benchmark interest rate), through futures contracts.
• |  | Hedging of expected highly probable transactions: to hedge the risk of variation in the amount of the commitments assumed when resulting from variation in the exchange rates.
*UF – Chilean unit of account / TPM – Monetary policy rate ITAÚ UNIBANCO HOLDING does not use the qualitative method to evaluate the effectiveness or to measure the ineffectiveness of these strategies. For cash flow hedge strategies, ITAÚ UNIBANCO HOLDING uses the hypothetical derivative method. This method is based on a comparison of the change in the fair value of a hypothetical derivative with terms identical to the critical terms of the variable-rate liability, and this change in the fair value is considered a proxy of the present value of the cumulative change in the future cash flow expected for the hedged liability.
Schedule of Each Strategy of Nominal Value and Fair Value Adjustments of Hedge Instruments and Book Value of Hedged Item |  |  |  |  |  |  |  |
|  | 12/31/2022
|  | Hedged item |  | Hedge instrument
Strategies | Heading | Book Value | Variation in value recognized in Other comprehensive income | Cash flow hedge reserve |  | Notional Amount | Variation in fair value used to calculate hedge ineffectiveness
|  | Assets | Liabilities |  |  |  |  |
Interest rate risk |  |  |  |  |  |  |  |
Hedge of deposits and repurchase agreements | Securities sold under agreements to resell | - | 149,300 | 1,169 | 1,169 |  | 149,210 | 1,222
Hedge of assets transactions | Loans and lease operations and Securities | 6,894 | - | (367) | (367) |  | 63,528 | (367)
Hedge of asset-backed securities under repurchase agreements | Securities purchased under agreements to resell | 52,916 | - | (1,508) | (1,508) |  | 50,848 | (1,508)
Hedge of loan operations | Loans and lease operations | 3,283 | - | (6) | (6) |  | 3,288 | (6)
Hedge of funding | Deposits | - | 6,881 | 86 | 86 |  | 6,967 | 86
Hedge of assets denominated in UF | Securities | 7,871 | - | 16 | 16 |  | 7,853 | 16
Foreign exchange risk |  |  |  |  |  |  |  |
Hedge of highly probable forecast transactions |  | - | 343 | 4 | 191 |  | 343 | 4
Hedge of funding | Deposits | - | 360 | (1) | (1) |  | 359 | (1)
Total |  | 70,964 | 156,884 | (607) | (420) |  | 225,396 | (554)
|  | 12/31/2021
|  | Hedged item |  | Hedge instrument
Strategies | Heading | Book Value | Variation in value recognized in Other comprehensive income | Cash flow hedge reserve |  | Notional Amount | Variation in fair value used to calculate hedge ineffectiveness
|  | Assets | Liabilities |  |  |  |  |
Interest rate risk |  |  |  |  |  |  |  |
Hedge of deposits and repurchase agreements | Securities sold under agreements to resell | - | 39,142 | 1,065 | 1,065 |  | 39,136 | 1,072
Hedge of assets transactions | Loans and lease operations and Securities | 8,621 | - | (409) | (409) |  | 8,213 | (409)
Hedge of asset-backed securities under repurchase agreements | Securities purchased under agreements to resell | 40,526 | - | (1,686) | (1,686) |  | 39,962 | (1,698)
Hedge of loan operations | Loans and lease operations | 131 | - | - | - |  | 131 | 1
Hedge of funding | Deposits | - | 5,749 | 30 | 30 |  | 5,779 | 30
Hedge of assets denominated in UF | Securities | 14,558 | - | (127) | (127) |  | 14,683 | (127)
Foreign exchange risk |  |  |  |  |  |  |  |
Hedge of highly probable forecast transactions |  | 3,508 | - | 185 | 740 |  | 3,508 | 185
Total |  | 67,344 | 44,891 | (942) | (387) |  | 111,412 | (946)
For strategies of deposits and repurchase agreements to resell, asset transactions and asset-backed securities under repurchase agreements, the entity frequently reestablishes the coverage ratio, since both the hedged item and the instruments change over time. This occurs because they are portfolio strategies that reflect the risk management strategy guidelines approved in the proper authority level. The remaining balance in the reserve of cash flow hedge for which the hedge accounting is no longer applied is R$ 187 (R$ 555 at 12/31/2021).
Summary of Hedge Accounting |  |  |  |  |  |  |
Hedge Instruments | 12/31/2022
Notional amount | Book Value (1) | Variations in fair value used to calculate hedge ineffectiveness | Variation in value recognized in Other comprehensive income | Hedge ineffectiveness recognized in income | Amount reclassified from Cash flow hedge reserve to income
|  | Assets | Liabilities |  |  |  |
Interest rate risk |  |  |  |  |  |  |
Futures | 206,586 | 31 | 27 | (653) | (706) | 53 | -
Forward | 10,037 | 136 | 646 | 11 | 11 | - | 1
Swaps | 8,071 | 201 | 11 | 85 | 85 | - | -
Foreign exchange risk |  |  |  |  |  |  |
Futures | 249 | 2 | - | - | - | - | 378
Forward | 94 | - | 1 | 4 | 4 | - | -
Swaps | 359 | 54 | - | (1) | (1) | - | -
Total | 225,396 | 424 | 685 | (554) | (607) | 53 | 379
Hedge Instruments | 12/31/2021
Notional amount | Book Value (1) | Variations in fair value used to calculate hedge ineffectiveness | Variation in value recognized in Other comprehensive income | Hedge ineffectiveness recognized in income | Amount reclassified from Cash flow hedge reserve to income
|  | Assets | Liabilities |  |  |  |
Interest rate risk |  |  |  |  |  |
Futures | 87,311 | 58 | 24 | (1,035) | (1,030) | (5) | (13)
Forward | 16,830 | 118 | 593 | (118) | (118) | - | -
Swaps | 3,763 | 19 | - | 22 | 21 | 1 | -
Foreign exchange risk |  |  |  |  |
Futures | 3,480 | 252 | - | 185 | 185 | - | -
Forward | 28 | - | - | - | - | - | -
Total | 111,412 | 447 | 617 | (946) | (942) | (4) | (13)
b) Hedge of net investment in foreign operations
ITAÚ UNIBANCO HOLDING's strategies for net investments in foreign operations consist of hedging the exposure in the functional currency of the foreign operation against the functional currency of head office.
The risk hedged in this type of strategy is the currency risk.
ITAÚ UNIBANCO HOLDING does not use the qualitative method to evaluate the effectiveness or to measure the ineffectiveness of these strategies.
Instead, ITAÚ UNIBANCO HOLDING uses the Dollar Offset Method, which is based on a comparison of the change in fair value (cash flow) of the hedging instrument, attributable to changes in the exchange rate and the gain (loss) arising from variations in exchange rates on the amount of investment abroad designated as the object of the hedge.
Summary of Hedge Accounting |  |  |  |  |  |  |
Strategies | 12/31/2022
Hedged item |  | Hedge instrument
Book Value (2) | Variation in value recognized in Other comprehensive income | Foreign currency conversion reserve |  | Notional amount | Variation in fair value used to calculate hedge ineffectiveness
| Assets | Liabilities |  |  |  |  |
Foreign exchange risk |  |  |  |  |
Hedge of net investment in foreign operations (1) | 8,983 | - | (14,836) | (14,836) |  | 9,933 | (14,996)
Total | 8,983 | - | (14,836) | (14,836) |  | 9,933 | (14,996)
Strategies | 12/31/2021
Hedged item |  | Hedge instrument
Book Value (2) | Variation in value recognized in Other comprehensive income | Foreign currency conversion reserve |  | Notional amount | Variation in fair value used to calculate hedge ineffectiveness
| Assets | Liabilities |  |  |  |  |
Foreign exchange risk |  |  |  |  |
Hedge of net investment in foreign operations (1) | 11,325 | - | (14,701) | (14,701) |  | 15,924 | (14,720)
Total | 11,325 | - | (14,701) | (14,701) |  | 15,924 | (14,720)
1) Hedge instruments consider the gross tax position. 2) Amounts recorded under heading Derivatives.
In the period, the amount of R$ 7,049 (R$ 11,752 at 12/31/2021) was reversed from the hedge relationship, which remaining balance in the Foreign currency conversion reserve (Stockholders' equity) is R$ (3,116) (R$ (5,265) at 12/31/2021), with no effect on the result as foreign investments were maintained.
Summary of Hedge Accounting |  |  |  |  |  |  |
Hedge instruments | 12/31/2022
Notional amount | Book Value (1) | Variations in fair value used to calculate hedge ineffectiveness | Variation in the value recognized in Other comprehensive income | Hedge ineffectiveness recognized in income | Amount reclassified from foreign currency conversion reserve into income
|  | Assets | Liabilities |  |  |  |
Foreign exchange risk |  |  |  |  |
Future | 1,673 | - | - | (5,751) | (5,710) | (41) | -
Future / NDF - Non Deliverable Forward | 5,186 | 176 | 126 | (2,521) | (2,411) | (110) | -
Future / Financial Assets | 3,074 | 4,380 | 1,839 | (6,724) | (6,715) | (9) | -
Total | 9,933 | 4,556 | 1,965 | (14,996) | (14,836) | (160) | -
Hedge instruments | 12/31/2021
Notional amount | Book Value (1) | Variations in fair value used to calculate hedge ineffectiveness | Variation in the value recognized in Other comprehensive income | Hedge ineffectiveness recognized in income | Amount reclassified from foreign currency conversion reserve into income
|  | Assets | Liabilities |  |  |  |
Foreign exchange risk |  |  |  |  |
Future | 2,126 | 286 | - | (3,252) | (3,241) | (11) | -
Future / NDF - Non Deliverable Forward | 8,036 | 209 | 95 | (3,534) | (3,529) | (5) | -
Future / Financial Assets | 5,762 | 6,566 | 3,653 | (7,934) | (7,931) | (3) | -
Total | 15,924 | 7,061 | 3,748 | (14,720) | (14,701) | (19) | -
c) Fair value hedge The fair value hedging strategy of ITAÚ UNIBANCO HOLDING consists of hedging the exposure to variation in fair value on the receipt and payment of interest on recognized assets and liabilities. ITAÚ UNIBANCO HOLDING applies fair value hedges as follows: Interest rate risk:
• |  | To protect the risk of variation in the fair value of receipt and payment of interest resulting from variations in the fair value of the variable rates involved, by contracting swaps and futures.
ITAÚ UNIBANCO HOLDING does not use the qualitative method to evaluate the effectiveness or to measure the ineffectiveness of these strategies. Instead, ITAÚ UNIBANCO HOLDING uses the percentage approach and dollar offset method:
• |  | The percentage approach is based on the calculation of change in the fair value of the revised estimate for the hedged position (hedged item) attributable to the protected risk versus the change in the fair value of the derivative hedging instrument.
• |  | The dollar offset method is based on the difference between the variation in the fair value of the hedging instrument and the variation in the fair value of the hedged item attributed to changes in the interest rate.
The effects of hedge accounting on the financial position and performance of ITAÚ UNIBANCO HOLDING are presented below:
Schedule of the Effect of Hedge Accounting on the Financial Position and Performance |  |  |  |  |  |  |  |
Strategies | 12/31/2022
Hedge Item |  | Hedge Instruments (2)
Book Value (1) | Fair Value | Variation in fair value recognized in income |  | Notional amount | Variation in fair value used to calculate hedge ineffectiveness
| Assets | Liabilities | Assets | Liabilities |  |  |  |
Interest rate risk |  |  |  |  |  |  |
Hedge of loan operations | 16,031 | - | 15,582 | - | (449) |  | 16,031 | 448
Hedge of funding | - | 14,603 | - | 13,905 | 698 |  | 14,603 | (703)
Hedge of securities | 7,363 | - | 7,134 | - | (229) |  | 7,317 | 225
Total | 23,394 | 14,603 | 22,716 | 13,905 | 20 |  | 37,951 | (30)
Strategies | 12/31/2021
Hedge Item |  | Hedge Instruments (2)
Book Value (1) | Fair Value | Variation in fair value recognized in income |  | Notional amount | Variation in fair value used to calculate hedge ineffectiveness
| Assets | Liabilities | Assets | Liabilities |  |  |  |
Interest rate risk |  |  |  |  |  |  |
Hedge of loan operations | 8,890 | - | 8,917 | - | 27 |  | 8,890 | (28)
Hedge of funding | - | 11,051 | - | 10,661 | 390 |  | 11,051 | (388)
Hedge of securities | 3,162 | - | 3,128 | - | (34) |  | 2,885 | 29
Total | 12,052 | 11,051 | 12,045 | 10,661 | 383 |  | 22,826 | (387)
1) Amounts recorded under heading Deposits, Securities, Funds from Interbank Markets and Loan and Lease Operations. 2) Comprises the amount of R$ 4,349 (R$ 6,422 at 12/31/2021), related to instruments exposed by the change in reference interest rates - IBORs.
At 12/31/2021, the amount of R$ 8,001 was reversed from the hedge relationship, which effective portion is R$ 125, with no effect on the result because it is a fair value hedge of securities at fair value through other comprehensive income. For loan operations strategies, the entity reestablishes the coverage ratio, since both the hedged item and the instruments change over time. This occurs because they are portfolio strategies that reflect the risk management strategy guidelines approved in the proper authority level.
Summary of Hedge Accounting |  |  |  |  |
Hedge Instruments | 12/31/2022
Notional amount | Book value (1) | Variation in fair value used to calculate hedge ineffectiveness | Hedge ineffectiveness recognized in income
|  | Assets | Liabilities |  |
Interest rate risk |  |  |  |
Swaps | 35,091 | 1,002 | 929 | (49) | (10)
Futures | 2,860 | 4 | - | 19 | -
Total | 37,951 | 1,006 | 929 | (30) | (10)
Hedge Instruments | 12/31/2021
Notional amount | Book value (1) | Variation in fair value used to calculate hedge ineffectiveness | Hedge ineffectiveness recognized in income
|  | Assets | Liabilities |  |
Interest rate risk |  |  |  |
Swaps | 22,826 | 2 | 551 | (387) | (4)
Total | 22,826 | 2 | 551 | (387) | (4)
The table below presents, for each strategy, the notional amount and the fair value adjustments of hedge instruments and the book value of the hedged item:
Schedule of Each Strategy of Nominal Value and Fair Value Adjustments of Hedge Instruments and Book Value of Hedged Item |  |  |  |  |  |  |
| 12/31/2022 |  | 12/31/2021
Hedge instruments | Hedged item |  | Hedge instruments | Hedged item
Notional amount | Fair value adjustments | Book Value |  | Notional amount | Fair value adjustments | Book Value
Hedge of deposits and repurchase agreements | 149,210 | (27) | 149,300 |  | 39,136 | (24) | 39,142
Hedge of highly probable forecast transactions | 343 | 1 | 343 |  | 3,508 | 252 | 3,508
Hedge of net investment in foreign operations | 9,933 | 2,591 | 8,983 |  | 15,924 | 3,313 | 11,325
Hedge of loan operations (Fair value) | 16,031 | 820 | 16,031 |  | 8,890 | (28) | 8,890
Hedge of loan operations (Cash flow) | 3,288 | (11) | 3,283 |  | 131 | - | 131
Hedge of funding (Fair value) | 14,603 | (762) | 14,603 |  | 11,051 | (388) | 11,051
Hedge of funding (Cash flow) | 7,326 | 391 | 7,241 |  | 5,779 | 137 | 5,749
Hedge of assets transactions | 6,528 | 1 | 6,894 |  | 8,213 | 8 | 8,621
Hedge of asset-backed securities under repurchase agreements | 50,848 | 30 | 52,916 |  | 39,962 | 50 | 40,526
Hedge of assets denominated in UF | 7,853 | (646) | 7,871 |  | 14,683 | (593) | 14,558
Hedge of securities | 7,317 | 19 | 7,363 |  | 2,885 | 29 | 3,162
Total |  | 2,407 |  |  |  | 2,756 |
The table below shows the breakdown by maturity of the hedging strategies:
Breakdown by Maturity of Hedging Strategies |  |  |  |  |  |  |  |
| 12/31/2022
| 0-1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | 5-10 years | Over 10 years | Total
Hedge of deposits and repurchase agreements | 108,499 | 26,120 | 9,110 | - | 4,726 | 755 | - | 149,210
Hedge of highly probable forecast transactions | 343 | - | - | - | - | - | - | 343
Hedge of net investment in foreign operations (1) | 9,933 | - | - | - | - | - | - | 9,933
Hedge of loan operations (Fair value) | 2,351 | 3,395 | 1,244 | 2,539 | 2,749 | 3,753 | - | 16,031
Hedge of loan operations (Cash flow) | - | 1,577 | 1,161 | - | 550 | - | - | 3,288
Hedge of funding (Fair value) | 1,673 | 885 | 1,288 | 3,091 | 579 | 4,981 | 2,106 | 14,603
Hedge of funding (Cash flow) | 5,776 | 578 | - | 675 | - | 297 | - | 7,326
Hedge of assets transactions | - | 6,528 | - | - | - | - | - | 6,528
Hedge of asset-backed securities under repurchase agreements | 16,696 | 9,705 | 22,740 | 1,085 | 622 | - | - | 50,848
Hedge of assets denominated in UF | 7,853 | - | - | - | - | - | - | 7,853
Hedge of securities | 3,215 | 660 | 1,547 | 180 | 346 | 673 | 696 | 7,317
Total | 156,339 | 49,448 | 37,090 | 7,570 | 9,572 | 10,459 | 2,802 | 273,280
| 12/31/2021
| 0-1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | 5-10 years | Over 10 years | Total
Hedge of deposits and repurchase agreements | 1,284 | 9,453 | 14,221 | 7,313 | 5,332 | 1,533 | - | 39,136
Hedge of highly probable forecast transactions | 3,508 | - | - | - | - | - | - | 3,508
Hedge of net investment in foreign operations (1) | 13,888 | - | - | - | - | - | - | 13,888
Hedge of loan operations (Fair value) | 3,377 | 1,522 | 797 | 838 | 809 | 1,547 | - | 8,890
Hedge of loan operations (Cash flow) | 131 | - | - | - | - | - | - | 131
Hedge of funding (Fair value) | 1,206 | 1,072 | 302 | 273 | 2,920 | 3,916 | 1,362 | 11,051
Hedge of funding (Cash flow) | 2,147 | 3,632 | - | - | - | - | - | 5,779
Hedge of assets transactions | 2,198 | - | 6,015 | - | - | - | - | 8,213
Hedge of asset-backed securities under repurchase agreements | 2,322 | 14,963 | 8,976 | 13,098 | - | 603 | - | 39,962
Hedge of assets denominated in UF | 10,148 | 4,535 | - | - | - | - | - | 14,683
Hedge of securities | - | 453 | 56 | 1,520 | 50 | 805 | - | 2,884
Total | 40,209 | 35,630 | 30,367 | 23,042 | 9,111 | 8,404 | 1,362 | 148,125
1) | Classified as current, since instruments are frequently renewed.

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