Who will corner the huge emerging market for Basel III-toughened securities?

Everyone in the City, it seems, agrees that the demand will be huge – but who will service it? The demand in question is the rapid development of a new generation of securities designed to allow banks to bolster their financial strength under the new Basel III standards. Linklaters last week secured bragging rights after taking a lead role on Credit Suisse's much-touted $8bn (£4.9bn) issue of contingent conversion capital instrument notes (dubbed CoCos) – a new form of convertible bond designed to switch to equity if the issuing bank suffers agreed levels of financial stress.

The Credit Suisse deal was structured as a $6bn (£3.7bn) private placement to two large investors and a $2bn (£1.23bn) open auction, which was heavily oversubscribed. Though several banks have used CoCos – notably Lloyds and Rabobank – the Credit Suisse bond is the first time such securities have been fully compliant as core capital under Basel III standards, which start to phase in from 2013.

The implications for banks and securities lawyers are considerable. Since Basel III is set to block most of the existing hybrid instruments from counting towards core bank capital, the potential issuance of compliant instruments like CoCos is vast. Barclays Capital analysts recently estimated that €700bn (£593bn) of such securities could be issued by 2018, while Standard & Poor's last year predicted the market could eventually reach $1trn (£617bn).

"All the attention on this [Credit Suisse bond] suggests that this kind of instrument is going to be a major feature of Tier 1 and 2 capital raising for banks," says Jonathan Fried, a managing associate at Linklaters who worked on the deal. "This has the feeling of being something new, something that could come to define the market for regulatory capital."

Given the numbers being kicked around, you would expect legal banking teams to be falling over themselves to push forward their capital markets experts as positioned to handle this kind of work. But Basel III is evolving so quickly – the final draft of the new standards only came out in December 2010 – that an established body of advisers has yet to emerge. That has left lawyers scrambling to find ways of creating structures that regulators will treat like equity but the taxman will view as debt. Indeed, researching this piece, it took a fair amount of effort to find lawyers with the confidence to comment on the field.

That said, there are obvious clues as to which firms will likely dominate. As this work fuses the fields of equity-linked securities and regulatory capital, firms with strong bond practices have a huge advantage. Throw in a strong equity capital market franchise and you're set fair. As such, it's little surprise to see Linklaters – which has advised on all three CoCos and has partners like Carson Welsh, Nigel Pridmore and Keith Thomson active in the field – casting a long shadow. Allen & Overy (A&O) and Clifford Chance also look well placed.

"These deals are quite challenging – you have an element of tax and regulatory arbitrage and then you have to be able to deal with local regulators who can add to the general framework of Basel," observes A&O partner Jonathan Mellor.

As is the way with securities work, it will be the advisers that pioneer the initial deals that are likely reap most of the repeat business. What will remain less certain is which US law firms will move into the market until it becomes more clear how US regulators will respond to Basel III in general and CoCo-like instruments in particular. But a shortage of contenders looks unlikely.