A new report from Moody’s Investors Service sees big changes for money market funds in response to regulatory developments in the U.S. and Europe, as well as prevailing market dynamics.

Moody’s says that it expects to see further consolidation among money market funds, or even funds closing, as the industry grapples with the forces of low interest rates, regulatory change, and evolving investor demands. The rating agency notes that funds “are faced with persistently low interest rates that continue to push investors to higher-yielding fund products, further reducing already-slim profits.”

“In addition, the diminishing supply of highly rated investments are forcing managers to develop and launch new products, as the industry changes shape and business models follow suit,” it adds.

On the regulatory front, it notes that possible reforms in the U.S. and Europe threaten the traditional structure of constant net asset value (CNAV) funds. The report imagines three reform scenarios, including: regulators requiring a move to variable net asset value (VNAV); only allowing certain types of funds to maintain the CNAV structure; or, imposing capital requirements and/or redemption limits on CNAV funds.

It sees a low probability of a wholesale move to variable NAV funds in both the U.S. and Europe. More likely, it suggests is that the U.S. would allow only government/treasury funds to maintain their CNAV structure, while prime and tax-exempt funds can only be variable NAV. The most likely scenario for Europe is the imposition of capital buffer requirements and/or redemption limits for all CNAV funds, it says; adding that there’s a moderate probability of implementation of these sorts of requirements in the U.S.

“Low interest rates, constrained asset supply, regulatory scrutiny and evolving investor preferences have already begun to transform the characteristics of money market funds,” said Yaron Ernst, managing director of Moody’s managed investments group. “Due to the changing product dynamics, we expect industry consolidation to accelerate, combined with a significant impact on the overall liquidity product landscape and investor preferences.”