* First public comments from investment bank on possible sale * Qatar has emerged has chief bidder for majority stake * Commodity trading VaR falls in third quarter Oct 18 (Reuters) - Morgan Stanley has an obligation to explore "different structures" for its commodities trading business because new regulations are limiting the unit's activities, Chief Executive James Gorman said on Thursday. The CEO's comments were the first time Morgan Stanley has publicly hinted at a possible sale of its multibillion-dollar oil and metals trading arm, which has been reported in the media for months. Morgan Stanley has been in discussions with OPEC member Qatar for more than a year over the sale of at least a majority stake in its energy-focused trading business, according to bankers. Speaking on a conference call with analysts after the firm reported better-than-expected quarterly results on Thursday, Gorman said changes under the U.S.' Dodd-Frank financial reform law restrict the kind of trading the firm can do in commodities. "There are potential limits to some of the activities that we can pursue in that business," Gorman said. "So it is incumbent upon us to explore all forms of different structures, appropriate structures, that can take us forward where we can get the benefits of the business but also meet the regulatory constraints that we operate under." On Monday, Qatari Prime Minister Sheikh Hamad bin Jassim al-Thani - who also heads the country's sovereign wealth fund - said the Gulf state was studying a proposal to invest in Morgan Stanley's commodities trading arm, but needed a few more weeks to "review the details." He did not elaborate on the terms of any possible investment. Morgan Stanley's commodities trading revenues have dropped sharply since 2008, partly because of the "Volcker rule," that bans banks from proprietary trading and partly because of capital constraints. WALL STREET REFINERS Along with archrival Goldman Sachs, Morgan Stanley was one of the original "Wall Street refiners" that broke into the energy derivatives market three decades ago. Oil trading is still estimated to make up about half its commodities business. But while Goldman and many rivals have shifted their focus to client "flow" business - market-making with funds, selling indexes to investors and hedging corporate risks - Morgan Stanley has resolutely remained a merchant-trader, focusing on the business of storing and transporting raw materials. Morgan Stanley's commodities unit has earned the bank an estimated $17 billion in revenue over the past decade, trading both financial contracts and physical commodities such as gasoline and diesel fuel. Based on Reuters calculations, Morgan Stanley's commodity revenues peaked at around $3 billion in 2008 but declined to $1.3 billion last year, their lowest level since 2005. Selling the capital-intensive commodities business would raise funds for the bank, which is preparing its balance sheet for higher capital and liquidity requirements under new rules, while allowing the divested unit to resume proprietary trading and maintain ownership of physical commodity assets. Earlier this month, banking sources said the talks with Qatar had run into difficulty and the deal might need to be reworked if it were to go ahead. But the comments from both sides this week suggest a sale remains a possibility. Qatar Holding, the investment arm of Qatar Investment Authority, the Gulf state's sovereign wealth fund, has led most foreign acquisitions. But it has usually focused on minority holdings, including stakes in Barclays, Credit Suisse, Volkswagen and Porsche. It also has full ownership of retailer Harrods. COMMODITY 'VaR' FALLS Morgan Stanley's adjusted earnings rose sharply in the third quarter compared with a year earlier as it boosted revenue from trading bonds, long a sore spot for the bank. The company's shares slid 3.8 percent to close at $17.79 on Thursday, with analysts citing worries about the sustainability of its results and a weak return-on-equity due to high costs. Morgan Stanley said its commodities trading risk fell in the quarter from the previous three months and a year earlier, and it unveiled a new format for calculating portfolio risk. Under the revised formula, its Value-at-Risk (VaR) in commodities averaged $22 million per day in the third quarter, down from $27 million in the second quarter and the $30 million a year earlier. VaR is an important consideration for investment banks when making trading and hedging decisions for an asset class. If the bank had used its previous formula for calculating risk, the commodities VaR for the third quarter would have been $27 million compared with $34 million in the second quarter and $32 million a year ago. Goldman Sachs said its commodities VaR for the third quarter stood at $22 million, compared with $20 million in the second quarter and $25 million a year ago. Goldman said significantly lower revenues from commodities weighed on its trading businesses in the quarter, singling out weak performance by a unit that was once the pride of the Wall Street titan. Commodities VaR at leading Wall Street banks over the past two years (in $ millions): Average commodities VaR by quarter 2012 2012 2012 2011 2011 2011 2011 2010 2010 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 * Morgan Stanley 22 27 -- -- 30 -- -- -- -- * Goldman Sachs 22 20 26 26 25 39 37 23 29 * JPMorgan 13 13 21 20 15 16 13 14 13 * Bank of America N/A 11.9 13.1 12.1 15.7 23.7 23.9 17.7 19.4 ** Citigroup N/A 17 14 18 22 25 23 27 26 * Value-at-Risk based on a 95 percent confidence level ** Value-at-Risk based on a 99 percent confidence level NOTES: Morgan Stanley figures adjusted for new VaR formula. Citigroup and Bank of America have issued third-quarter results, but their VaR readings are reported in a separate regulatory filing.