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April 2021

Welcome to our monthly KPMG Asset Management Insights newsletter, which has been designed to keep you up to date on topical issues within the Asset Management sector.


Central Bank of Ireland updates

European Commission and ESA updates

Industry and other updates

Central Bank of Ireland Updates

1. Central Bank of Ireland notes lack of progress in gender diversity at senior levels within regulated firms

On 8 March, the Central Bank of Ireland published a Demographic Analysis Report of over 3,600 applications for approval to occupy senior roles within regulated firms in Ireland, received under the Fitness and Probity regime in 2020. Among the key developments noted in the report were:

  • The slow pace of progress in the level of gender diversity in applications – whereas approximately 16% of applications received in 2012 were for women, this increased to just 26% in 2020, with little overall change between 2019 to 2020.
  • The high percentage of incumbent PCF positions occupied by men in high impact regulated firms, including 85% of PCF positions in the asset management sector (78% in the banking and 74% in the insurance sectors, respectively).
  • The continued existence of a pronounced gender imbalance at board level across all sectors, in respect of which there was a 2% reduction in female applications between 2019 and 2020 to 22%.
  • Less than one sixth of applicants for roles responsible for driving strategy or business revenue were female in 2020.

Commenting on these findings, Ed Sibley, the Central Bank of Ireland’s Deputy Governor, stated that it was disappointing to see the slow pace of progress, which had, in some respects, stalled during 2020. Mr Sibley noted that a lack of diversity at senior management and board level was a leading indicator of heightened behaviour, culture and governance risks, and that diversity would continue to be a priority for the Central Bank. Mr Sibley further noted that the Central Bank will continue to require improvements in this area through thematic reviews and the publication of research in this area.

2. Central Bank of Ireland issues letter to fund management companies in respect of ESMA review

On 10 March, the Central Bank issued a letter to fund management companies surveyed as part of an ESMA co-ordinated exercise in 2020 analysing the preparedness of funds with significant exposures to corporate debt to potential future shocks, including any resumption of significant redemptions and/or an increase in valuation uncertainty. The Central Bank noted that while the letter was specific to this set of firms and a sub-set of funds they manage, the findings from the ESMA review were important and should be noted by all firms.

The Central Bank requests that firms in receipt of the letter to consider how their liquidity management frameworks and fund structures should be adapted to take into account the experience and lessons learned from the market and redemption activity in 2020, as well as the findings of the ESMA report. Such considerations should take into account the steps needed to increase funds’ resilience to future shocks, in addition to the following elements, in considering what changes may be required:

  • The alignment between the liquidity profile of funds' investments, the risk profile of investors, redemption policies and settlement periods and the development of new policies to correct misalignments in a timely manner.
  • Ensuring the full suite of liquidity management tools (LMTs) are in place and used appropriately, including consideration of the circumstances where LMTs are appropriate outside of stress scenarios, given their potential to enhance investor protection and dampen the effect of large increases in redemption requests on market conditions. Fund management companies should consider the extent to which the use of swing pricing or anti-dilution levies are required to ensure that transaction costs, including liquidity premia, associated with redemptions are borne by those exercising their redemption rights, limiting the effect of large redemption flows on remaining investors, particularly in times of stress and market volatility.
  • The firm’s policies and procedures around the use of LMTs should include appropriate disclosure in fund documentation and communication with investors to ensure clarity and transparency around the regular use of LMTs and conditions for their implementation.
  • An assessment of all other factors that could impact fund liquidity or trigger an unplanned sale of assets. For example, the possibility of increased margin calls that may increase cash needs.
  • A realistic and conservative estimate of which percentage of a fund’s assets can be liquidated over certain time periods, ensuring that redemption policies were aligned with this assessment.
  • Information on the profile of the investor base to better understand any potential risks associated with redemption patterns, particularly in stressed market conditions.
  • Designing and testing funds’ liquidity risk management frameworks and planning for future market disruption events should not assume government or central bank intervention of the nature or scale seen in 2020.

The letter notes that fund management companies that were surveyed should conclude their consideration of this matter, including approval by their respective boards, by no later than end-June 2021, with any action plan required to be adopted to be implemented promptly and by no later than December 2021.

3. Central Bank of Ireland sets out conduct priorities for 2021

On 16 March, Derville Rowland, the Central Bank of Ireland’s Director General for Financial Conduct, delivered a speech outlining the Central Bank’s financial conduct priorities for 2021. While referring to the Consumer Protection Outlook Report 2021, which sets out in detail the risks and priorities to which the Central Bank will be paying particular attention, Ms Rowland made particular reference to the topic of investor protection, and the responsibility of firms, including funds, to act in a manner that preserves the integrity of the market and protects the interests of investors.

Ms Rowland noted that this included firms’ responsibility to ensure effective management of liquidity risk in funds, and noted the Central Bank’s involvement in work at an EU and international level to consider and apply the lessons of the volatility experienced in 2020, and to follow through on the Central Bank’s findings on various initiatives in this field. In this respect, it was noted that the Central Bank will focus its attention on the findings of the CP86 framework for fund management companies’ governance, management and effectiveness, particularly with the Q1 2021 deadline imposed on firms to put in place action plans to implement the Central Bank’s findings fast approaching.

Ms Rowland noted that the Central Bank will also commence an ESMA Common Supervisory Action on costs and fees in UCITS funds, and will work with other regulators to enhance EU supervisory convergence in this area. In order to increase its effectiveness in the area of securities markets, the Central Bank has brought together a number of key supervisory activities, and is in the process of establishing a new Funds Supervision Division, located within the Securities and Markets Supervision Directorate, which will bring the authorisation and supervision of funds and funds service providers together in a combined team.

European Commission and ESA updates

4. EBA publishes opinion on risks of money laundering and terrorist financing affecting the EU’s financial sector

On 3 March, the European Banking Authority (‘EBA’) published an opinion and report on the risks of money laundering and terrorist financing affecting the European Union’s financial sector, drawing on the information provided by national competent authorities (’NCAs’) and setting out proposed actions. The opinion notes that NCAs continue to be concerned about weaknesses in firms’ counter-financing of terrorism (‘CFT’) systems and controls, and proposes that NCAs engage in close and ongoing cooperation with financial intelligence units (‘FIUs’), law enforcement and the private sector.

With respect to the risks identified in the collective investment undertaking and fund management sector, the report notes that most NCAs consider the sector as presenting a ‘moderately significant’ inherent risk profile; however, the EBA has observed that a large number of NCAs have cited the sector’s exposure to cross-border transactions as an area of concern. The EBA also observes that while NCAs generally rated the quality of controls as good, a sizeable proportion assessed some controls as being poor, such as those relating to transaction monitoring and suspicious transaction reporting. The opinion further observes that a significant proportion of NCAs had not assessed controls related to either the adequacy or effectiveness of governance structures, and that the overall level of supervisory activity in the sector remained relatively low.

In consequence of these observations, the EBA has proposed that NCAs consider how best to address the control weaknesses identified as part of their supervisory approach, and to increase their focus on governance within the sector to ensure that firms are implementing appropriate oversight and management of their AML/CFT control frameworks. The EBA also reminds NCAs that while regulatory returns are an effective supervisory tool for gathering data on risks associated with individual firms, they do not provide reliable data on the quality and effectiveness of mitigating measures in place, and therefore are not a substitute for risk-based on- and off-site supervision.

5. ESMA updates statement on the impact of Brexit on the Benchmark Regulation

On 9 March, the European Securities and Markets Authority (‘ESMA’) issued a statement in relation to the consequences of Brexit for the ESMA register for benchmark administrators and third country benchmarks under the Benchmark Regulation (‘BMR’).

The statement clarifies that following the end the of the Brexit transition period, UK-based administrators initially included in the ‘ESMA register of administrators and third country benchmarks’ have been deleted, but are now qualified as third country administrators. However, due to the fact that the BMR transitional period has recently been extended to 31 December 2023, the change in the ESMA register does not yet have an effect on the ability of ‘EU27’ supervised entities to use the benchmarks provided by any third country administrator, including those from the UK. During the BMR transitional period, third country benchmarks (such as UK-based benchmarks) can still be used by supervised entities in the EU if the benchmark is already used in the EU as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund.

The extended BMR transitional period is also applicable to UK-recognised or endorsed third country benchmarks included in the ESMA register prior to the end of the UK transition period following a recognition or an endorsement status granted by the UK, and until 31 December 2023, deletion from the ESMA register does not have an effect on the ability of EU27 supervised entities to use those third country benchmarks that were endorsed or recognised in the UK before the end of the Brexit transition period.

In the absence of an equivalence decision by the European Commission, UK-based administrators and third country benchmarks previously endorsed or recognised in the UK will have until the end of the BMR transitional period to apply again for recognition or endorsement in the EU in order to be included in the ESMA register.

6. European Commission launches targeted consultation on supervisory convergence and the single rulebook

On 12 March, the European Commission published a consultation document on supervisory convergence and the single rulebook as part of the Capital Markets Union action plan published in September 2020. The consultation seeks to take stock of what has been achieved so far in respect of the framework for supervising European capital markets, banks, insurers and pension funds, and will feed into the preparation of a report required under the CMU action plan, and contribute to a wider debate on supervisory convergence and the single rulebook.

The deadline for submissions is 21 May 2021.

7. ESAs consult on taxonomy-related product disclosures

On 15 March, the Joint Committee of the European Supervisory Authorities (‘ESAs’) published a joint consultation paper on taxonomy-related sustainability disclosures. The paper seeks input on the draft Regulatory Technical Standards concerning disclosures of financial products investing in economic activities that contribute to an environmental investment objective. The proposed draft RTS aim to both facilitate disclosure to end-investors regarding the investment of financial products in environmentally sustainable activities, as well as to create a single rule book for sustainability disclosures under the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation.

The proposal set out by the ESAs comprises both a graphical representation of the taxonomy alignment of investments of the financial product and a key performance indicator calculation in respect of that alignment, as well as a statement that the activities funded by products qualifying as environmentally sustainable, are compliant with the Taxonomy Regulation.

The closing date for submissions is 12 May 2021.

8. ESMA updates Q&As on the UCITS and AIFM Directives

On 23 March, ESMA updated its Q&As on the application of the UCITS Directive, adding two new Q&As on the ESMA guidelines on performance fees and certain types of AIFs:

  • An answer on crystallisation of performance fees clarifies that the guidelines on performance fees do not prevent the payment of performance fees during the performance reference period of 5 years and/or in the first years of a fund’s existence. However, this should not prevent the imposition of stricter rules by NCAs.
  • An answer on the timeline of the application of the performance reference period provides that managers of any funds already compliant with paragraphs 40 and 41 of the guidelines on performance fees (recommending a minimum 5 year performance reference period) prior to the application date of the guidelines should look at the past 5 years or the whole life of the fund for the purpose of setting the performance reference period, and not reset the reference period after the application date of the guidelines. In all other cases, managers should apply the performance reference period starting from the beginning of the financial year following 6 months from the application date of the guidelines.

ESMA also updated its Q&As on the application of the AIFMD, which provides identical answers to those above, in addition to clarifying that ELTIFs marketed to retail investors that do not have a closed-ended structure within the meaning of Article 1(2) of Delegated Regulation 694/2014, and are not venture capital/private equity or real estate AIFs, are within the scope of the guidelines. 

9. ESMA assesses compliance with UCITS liquidity rules, highlighting areas for vigilance

On 24 March, ESMA published the results of the 2020 Common Supervisory Action (‘CSA’) on liquidity risk management within UCITS. The CSA found that the overall level of compliance with the applicable rules was satisfactory in most cases, but that there was room for improvement for some UCITS. The CSA also highlighted certain areas in which ESMA will focus its attention in order to promote supervisory convergence across NCAs.

The report refers to a number of areas for improvement reported by NCAs having regard to findings made against a limited number of UCITS, as well as observed best practice, including:

  • The documentation of liquidity risk management arrangements, processes and techniques in some cases were absent or lacked clarity or granularity in key areas such as pre-investment liquidity analyses and forecasts, design phase, escalation processes and verification of data reliability;
  • The quality of liquidity risk management (‘LRM’) procedures, which in some cases did not provide for the documentation of LRM arrangements, processes and techniques or did not cover all asset types or the use of liquidity management tools.
  • The quality of LRM mechanisms and methodologies, which, in respect of the latter, was not always appropriate, forward-looking, nor justified and back-tested.
  • In some cases, an over-reliance on a liquidity presumption with respect to listed securities.
  • Examples of the application of liquidity presumptions to financial instruments which were not admitted to or dealt on regulated markets in violation of Article 2(1) of the UCITS Eligible Assets Directive.
  • Instances of delegation of the LRM functions to the entity to whom the portfolio management function was also delegated, with an insufficient involvement of the internal risk management function, as well as insufficient delegation monitoring and due diligence.
  • In some cases, a widespread lack of data quality checks where there was overreliance on very few data providers.
  • In some cases, missing, inaccurate or unclear disclosures on liquidity risks and liquidity management tools to investors in UCITS KIID and/or prospectuses.
  • In some cases, insufficient (through infrequency, granularity and/or clarity) reporting to senior management.
  • In certain cases, no regular second and third-level controls of LRM policies and procedures, which were not able to detect the shortcomings identified by NCAs in the course of the CSA.
  • External controls by the depositary and external auditors of the UCITS and UCITS managers were not performed in all cases.

Market participants are asked to critically review their LRM frameworks in order to ensure that none of the adverse supervisory findings referred to above may be found in their respective LRM frameworks, and to ensure compliance with all relevant UCITS regulatory requirements. NCAs will undertake follow-up actions on individual cases to ensure that regulatory breaches as well as other shortcomings or weaknesses identified are remedied.

10. ESMA consults on the legislative framework for EU money market funds

On 26 March, ESMA published a consultation report setting out proposals for reforms of the Money Market Funds Regulation (‘MMFR’), which aims to review the stresses experienced by MMFs in March 2020 and to assess the roles played by markets, investors and regulation.

The report includes four types of potential reforms for MMFs, namely:

  • Reforms targeting the liability side of MMFs – such as decoupling regulatory thresholds from suspensions/gates to limit liquidity stress, and to require MMFs to use mechanisms such as swing pricing, and/or anti-dilution levies/liquidity fees. It is suggested that these would allow the transfer of the liquidity costs of assets sale to redeeming investors, and would also help reduce redemption requests under stressed market conditions.
  • Reforms targeting the asset side of MMFs by, for example, reviewing requirements around liquidity buffers and their use. It is suggested that countercyclical liquidity buffers could also be combined with mandatory swing pricing in order to limit any trigger effect. A further suggested measure to make liquidity buffers more risk sensitive and flexible would be to differentiate the level of liquidity buffers according to funds’ structural exposure to funding risk.
  • Reforms targeting both the liability and asset side of MMFs by reviewing the status of certain types of MMFs such as stable Net Asset Value (NAV) MMFs and Low Volatility Net Asset Value (LVNAV), and eliminating CNAV and LVNAV funds.
  • Reforms that are external to MMFs themselves by assessing whether the role of sponsor support should be modified. Options could include an outright ban of sponsor support, or the development of an ex-ante framework to allow it, while seeking to mitigate risks that might arise.

In addition to the above, ESMA is also gathering feedback from stakeholders on other potential changes, in particular strengthening the role of MMF stress-testing, further harmonising and enhancing the international MMF reporting framework, as well as the disclosure of information on the main investors of money markets to help understand the dynamics of the market. The report also considers the setting up of a liquidity exchange facility funded by MMFs or asset managers, which is suggested could serve as a centralised source of liquidity and/or credit during periods of stress, and could mitigate liquidity pressures on MMFs and reduce the benefit of first mover advantage for investors resulting in an accelerating spiral of redemptions and asset fire sales.

The closing date for submissions is 30 June 2021.

11. ESMA proposes amendments to MiFIR transactions and reference data reporting regimes

On 30 March, ESMA published the final report on the review of transaction and reference data reporting obligations under MiFIR, which is particularly relevant for inter alia asset management companies. The report contains recommendations for possible legislative amendments to MiFIR/MiFID II in order to simplify the current data reporting regimes while still ensuring quality and usability of reported data.

Among the recommendations is to extend the scope of reporting requirements under Article 26 of MiFIR to UCITS and AIFM firms when they provide at least one MiFID service to third parties. Having regard to the scope of financial instruments to be reported, the report proposes a simplification of the Traded on a Trading Venue (ToTV) concept, with respect to the final report on the transparency regime for non-equity instruments and the trading obligation for derivatives. The report also includes proposals to further align the transaction reporting obligation with the Benchmark Regulation, as well as the Market Abuse Regulation and EMIR.

12. ESAs warn of expected deterioration of asset quality

On 31 March, the three ESAs issued their first joint risk assessment report of 2021, highlighting how the COVID-19 pandemic continues to weigh heavily on short-term recovery prospects. The report also highlights a number of vulnerabilities in the financial markets and warns of possible further market corrections. The pandemic has also added to the pre-existing challenges to profitability within financial institutions, has led to liquidity challenges in certain segments of the investment fund sector, and is expected to result in a deterioration in asset quality within the EU banking sector.

Having regard to the above, the ESAs recommend that the following policy actions be taken by NCAs, financial institutions and market participants:

  • Preparation for an expected deterioration of asset quality by financial institutions and supervisors;
  • Supervisors, policy makers and financial institutions should continue to develop further actions to accommodate a “low-for-long” interest rate environment and its associated risks.
  • Financial institutions should continue to follow conservative policies on dividends and share buy-backs, with prudence required in order to maintain sufficient capitalisation.
  • Investment funds should further enhance their preparedness in the face of potential increases in redemptions and value shocks. In this regard, the alignment of fund investment strategy, liquidity profile and redemption policy should be supervised, as well as funds’ liquidity risk assessment and valuation processes.
  • The report also notes the need for additional specifications for liquidity profiles and reporting, as well as an increase in the availability and use of liquidity management tools, to be taken forward in the context of the AIFMD review and the harmonisation between the UCITS and AIFMD frameworks to ensure greater investor protection.

Industry and other updates

13. EFAMA calls on the European Commission to reflect the EFRAG recommendations for mandatory European Sustainability Reporting Standards in the upcoming NFRD review

On 10 March, the European Fund and Asset Management Association (‘EFAMA’) called on the European Commission to reflect the European Financial Reporting Advisory Group (‘EFRAG’) recommendations for mandatory European Sustainability Reporting Standards in the upcoming Non-Financial Reporting Directive (‘NFRD’) review in light of EFAMA’s view that the “lack of data quality on how companies perform against sustainability metrics stands out as a fundamental challenge to leveraging private capital addressing the European Green Deal funding gap”. EFAMA further believes that an accelerated development of such mandatory standards could unleash the impact of sustainable finance, citing a number of positive attributes related to EFRAG’s proposals. 

14. EFAMA publishes markets insights report looking at the ESG UCITS market, the impact of COVID-19, and the behaviour of non-ESG funds

On 11 March, EFAMA published its latest Market Insights report, examining major trends in the ESG UCITS market, the impact of the COVID-19 pandemic and the behaviour of ESG and non-ESG funds, highlighting a number of matters, including:

  • Growth of ESG funds at more than double the rate of non-ESG funds in the last 5 years;
  • An increase in ESG funds by 37.1% in 2020 to reach €2.1tn as of end-December, with net sales of €235bn in 2020;
  • The proportion of actively managed funds (80%) versus passive funds (20%) in the ESG fund universe;
  • The dominance of environmental funds within the ESG impact fund category, with those funds focussing on low carbon emission being the most dominant (55%);
  • The broadly similar performance of ESG and non-ESG funds since 2016, save for in 2020 when ESG equity and bond funds recorded a higher average gross performance; and
  • The slightly cheaper average cost of ESG funds as compared to non-ESG funds, with a downward cost trend for both types of funds.

15. EFAMA publishes response on the establishment of a European Single Access Point

On 12 March, EFAMA published its response to the European Commission’s consultation on the establishment of a European Single Access Point (‘ESAP’) for financial and non-financial information publicly disclosed by companies, providing six key recommendations for the platform’s development:

  1. The platform should not duplicate existing reporting requirements nor include information not subject to public distribution;
  2. The platform should be built incrementally, differentiating between the priority levels attributed to ESG and financial information;
  3. The ESAP must establish synergies with the revision of the NFRD and preparatory work of EFRAG so that data following European sustainability reporting standards is directly channelled into the platform, and a possible regulatory framework for ESG data providers should mandate the disclosure of ESG ratings in the ESAP;
  4. The ESAP should allow companies not subject to the NFRD reporting obligations to provide voluntary disclosures, and there should be a set of pre-defined sustainability data for companies choosing to disclose such information voluntarily regardless of size or geographic location;
  5. All information on the ESAP should be comparable in content, and rendered in a structured, machine-readable and AI-compatible format;
  6. The ESAP governance should include EU authorities as well as national authorities, investors, reporting companies, EFRAG and the working group on data and usability of the Platform on Sustainable Finance.

16. EFAMA and other trade associations write to the Commission and ESMA regarding the implementation of the CSDR settlement discipline regime

On 11 March, EFAMA and 14 other trade associations representing a range of stakeholders in European and global financial markets wrote to the European Commission and ESMA raising concerns about the implementation of the mandatory buy-in requirement under the EU’s CSDR Settlement Discipline Regime. In their letter, it is stated that while the trade associations agree that many features of the regime will drive greater settlement efficiency and improved operational processes, the mandatory buy-in regime requires thorough reassessment as to its appropriateness.

It is noted that a key concern of the associations’ members is that the current legislative timetable requires market participants to proceed with a major implementation exercise without any indication of the scope or timing of the review process, which may result in ongoing implementation effort and investment being rendered redundant, or a repetition of the exercise, which would damage the development and reputation of the EU’s financial markets. The letter suggests that a more robust approach would be to make the necessary revisions to the mandatory buy-in regime prior to attempting implementation, which is considered would not affect the implementation of other aspects of the regime in February 2022, assuming no further fundamental changes are proposed.

17. EFAMA publishes latest funds statistics

On 24 March, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for January 2021, which totalled €83bn, down from €174bn in December. While UCITS recorded net inflows of €66bn (€121bn in December), AIFs recorded net inflows of €17bn (€53bn in December). Total net assets of UCITS and AIFs increased by 0.8% to €18.98tn.

In addition, on 16 March, EFAMA published its report on international statistics for Q4 2020, in which it was noted that net inflows into worldwide long-term funds recorded net inflows of €582bn, up from €411bn in Q3 2020, with Europe and the US accounting for the majority of net sales. Net assets of worldwide investment funds increased by 10.9% in Q4 2020. 

18. IOSCO publishes work programme for 2021-2022

On 26 February 2021, the International Organization of Securities Commissions (‘IOSCO’) published its work programme for 2021-2022 to further its objectives of protecting investors, maintaining fair, efficient and transparent markets and addressing systemic risks. The programme covers eight priorities, two of which are new, namely:

  • Financial stability and systemic risks of non-bank financial intermediation activities, in respect of which a number of reports are expected to be published, including a report on liquidity risk and its management in open-ended funds (late-2021), a report on valuations in funds, a report on exchange-traded funds (late-2021/H1 2022), and a report on global leverage in investment funds.
  • Risks exacerbated by the COVID-19 pandemic, such as misconduct risk, fraud and operational resilience, in respect of which impact-related reports are to be delivered by 2022.

IOSCO will also focus on six other topics, namely:

  • Sustainable finance -  with the delivery of a report on sustainability-related disclosures for issuers by end-June 2021, and delivery of reports on sustainability-related disclosures for asset managers, ESG ratings and ESG data providers by end-2021.
  • Passive investing and index providers – IOSCO is developing a thematic analysis report on the impact of the growth of passive investing on equity capital markets, and will produce a report on conduct-related issues in index provision, to be delivered in 2021.
  • Market fragmentation in securities and derivatives markets, with a review to be undertaken in 2021 on the use of supervisory colleges and other mechanisms of cooperation with the aim of identifying good practices that authorities can use in establishing and conducting supervisory activities.
  • Crypto-assets and stablecoins – conducting follow-up work to the FSB Regulatory Issues in Stablecoins report.
  • Artificial intelligence and machine learning (‘AIML’) – IOSCO continues to explore how AIML is being used in capital markets, and their associated emerging risks, and expects to publish its final report on the use of AIML by market intermediaries and asset managers in Q2 2021.
  • Retail distribution and digitalisation – IOSCO is currently developing a set of policy measures to address and mitigate the risks posed by online cross-border marketing and distribution, and will deliver its final report by end-Q3 2021.

Contact us for more

For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management