NEW YORK, April 4 (Reuters) - A new U.S. accounting rule that allows companies to change the way they value financial securities may have driven up to $20 billion worth of selling in the mortgage-backed securities market in recent weeks. This accounting change has opened up a one-time chance for banks and other financial companies to clean up their balance sheets, especially those saddled with investment losses stemming from the subprime mortgage crisis, analysts said. The selling is also drawing attention of regulators who fear some companies may be trying to manipulate the standard's adoption process to avoid recognizing earnings losses. Reuters Pictures Photo Editors Choice: Best pictures from the last 24 hours. View Slideshow The Financial Accounting Standards Board (FASB), which sets accounting rules in the United States, adopted the fair value option in February. The standard, also known as FAS 159, allows companies to irrevocably choose to record the value of certain financial instruments on their balance sheets based on what that instrument could be traded for in a current market transaction. Under the new rule, losses on securities can be recognized against retained earnings rather than current earnings. This could cushion the shares of a bank or financial company, if it were to suffer severe losses in market value on its investments because traders typically react to fluctuations in income, not retained earnings, analysts said. "Banks could take losses without running into their income statements," said Walt Schmidt, manager of mortgage products and strategy at FTN Financial Capital Markets in Chicago. "It's a hit on capital, but not income." Another move banks and financial companies could make under this new rule is to mark an underperforming asset to market on its balance sheet, then sell the security and later repurchase the same security but choose not to mark it to market in the future. Such trades would allow a company to take the loss on the security through retained earnings rather than income, but not modify its portfolio. However, that type of trade may come under scrutiny by regulators. Jim Kroeker, deputy chief accountant at the Securities and Exchange Commission, said the SEC is interested in these accounting-related sales. "Regardless of whether these engineered transactions achieve their accounting goal ... you can expect the SEC to have a continued interest in this topic," he said at a conference in New York on Wednesday. Reuters Pictures Photo Editors Choice: Best pictures from the last 24 hours. View Slideshow FAIR-VALUE ACCOUNTING TREND FASB has been increasingly requiring the use of fair value accounting in its standards. In February FASB said the fair value option was designed to reduce complexity in accounting for financial instruments. The FASB standard takes effect in fiscal years beginning after November 15, but some companies have elected to adopt the standard early. In March, for example, Morgan Stanley (MS.N: Quote, Profile , Research) said in its first quarter earnings release that early adoption of the FAS 159 led to a $186 million gain to its retained earnings. WEIGHING OPTIONS In the mortgage-backed securities market, the early adoption of the standard may be leading to sales of discount securities, as some analysts suspect companies are restructuring their portfolios. "To date, we estimate roughly $10 billion in securities are being sold for FASB 159 reasons," according to UBS this week. Estimates on Wall Street vary, generally ranging from several billion dollars to $20 billion. Reuters Pictures Photo Editors Choice: Best pictures from the last 24 hours. View Slideshow While the FAS-159-related sales so far have been small relative to the entire $6.5 trillion mortgage bond sector, it is uncertain the volume of holdings banks and others could unleash on the market. U.S. banks held $955 billion of mortgage assets in late March, up $8 billion from the end of December, according to the Federal Reserve. Thus far, there have been ample buyers to absorb the added MBS supply in the open market. "Everything has been been traded well," FTN's Schmidt said. However, not all banks are choosing early adoption of the standard, which has limited some of the selling. "Right now, there's enough disagreement about it and enough flux and questions that it's difficult to know, if you did early adopt, what assets and liabilities to move, what rationales are acceptable or not," Alec Crawford, head of MBS strategy at RBS Greenwich in Greenwich, Connecticut, said Wednesday in an investor call. This is the second time in the past 12 months that accounting changes have sparked MBS and asset-backed debt selling. A change to derivative accounting rules in FAS 155 prompted MBS demand concerns. But under pressure from industry groups in October, FASB exempted most MBS from having to comply with the change. (Additional reporting by Richard Leong) (Editing by Tim Dobbyn; Reuters Messaging: rm://emily.chasan.reuters.com@reuters.net;Tel: +1 646 223 6114))