Canadian financial firms should be prepared to abandon the troubled financial benchmark LIBOR or face supervisory action, federal financial regulators said on Tuesday.

In a letter to the industry, the Office of the Superintendent of Financial Institutions (OSFI) set out its expectations for the planned transition away from LIBOR.

“We are entering into a critical phase in the transition to risk-free rates globally,” OSFI said in its letter, adding that it expects Canadian financial firms to “complete their efforts to ensure a seamless transition to new reference rates” before LIBOR is discontinued.

For most LIBOR currencies, firms “should have already stopped entering into new transactions using LIBOR as a reference rate,” OSFI said, given that most of the benchmarks are due to be discontinued by the end of the year.

Global regulators and policymakers have been making preparations for the industry to stop using LIBOR as a critical benchmark in financial products, including derivatives transactions, following a market manipulation scandal in wholesale financial markets.

That scandal initially led to efforts to reform the benchmark, which have since been abandoned in favour of plans to introduce new financial benchmarks.

OSFI said it also expects firms to be “fully prepared to transact” in alternative risk-free rates by the end of 2021, and to have adequate contingency plans to deal with potential issues that may emerge when LIBOR ends.

The regulator also signalled that it’s prepared to take supervisory action against firms that aren’t adequately prepared to stop using LIBOR.

“For [firms] with material exposure to LIBOR, OSFI will be considering LIBOR transition efforts and project delivery in supervisory risk assessments, and taking supervisory actions where needed if there are significant deficiencies in transition efforts or processes,” the agency said.

Transactions that use U.S.-dollar LIBOR, which will continue to be published until June 30, 2023, “should include robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation,” OSFI said.