By David Sheppard LONDON, Oct 18 (Reuters) - Morgan Stanley's commodity revenues were up modestly in the third quarter, the bank said on Friday, extending a mild recovery, as the company awaits a decision from the Federal Reserve on the future of its physical trading business. Speaking on the bank's third-quarter earnings call, Chief Financial Officer Ruth Porat said that a recovery in client activity had bolstered commodities for the second straight quarter, following a 77 percent collapse in revenue year-on-year in the first three months of 2013. "Commodities revenues were up modestly, driven by higher client activity," Porat said. But Porat and Chief Executive James Gorman offered few clues on the call about the future of the bank's multibillion-dollar physical commodities trading operation, which has come under threat from the Federal Reserve's surprise "review" of Wall Street's role in the natural resources supply chain. "It's been a good business for us for many years. We want to be smart about what we do," Porat said, adding there was, no update on the future of the business at this point. Morgan Stanley is widely seen as the bank that has gone further than any other into real-world commodity business, with its oil storage and terminalling subsidiary, TransMontaigne, trading of crude oil, gasoline and diesel cargoes worldwide, and stakes in a number of power plants. Speaking to Reuters earlier on Friday, Porat said the bank has not received any clarity from the Federal Reserve about whether new regulations will force it to sell or change parts of its commodities business. "We've read what you've read in the press - we don't have any update other than that," she said. Wall Street's commodity traders came under intense political and regulatory pressure this summer following a number of market manipulation scandals, and a focus in Washington on whether "too big to fail" banks may be taking on unknown financial risks by operating oil tankers and electricity plants. On Thursday Goldman Sachs reported that its commodity net revenues declined significantly in the third quarter, though it reiterated its commitment to the business and said it had made more money year-on-year. JPMorgan Chase & Co, which rose after the financial crisis to challenge Morgan Stanley and Goldman in commodities, announced in July it was selling its physical commodities business, arguing the returns did not justify the regulatory and financial risks. Morgan Stanley has previously floated a possible sale or spin-off of its commodity business, but initial interest from Qatar's investment fund last year appears to have gone cold. Morgan Stanley's overall third-quarter revenue jumped 50 percent, helping adjusted earnings beat expectations, as higher income from equities sales and trading made up for a drop in the Wall Street bank and brokerage's fixed-income business. The bank's fixed income, currencies and commodities revenues fell 44 percent to $835 million, with the slight improvement in commodities overshadowed by far lower bond trading volumes as investors expected the Fed to start tapering its monetary stimulus program. KEEPING RISK CLOSE TO HOME Morgan Stanley trimmed its commodity trading risk in the third quarter from the previous three months but held its position as the Wall Street company with the most money at play in the sector. Morgan Stanley's Value-at-Risk (VaR) in commodities stood at $20 million in the third quarter, down from $24 million in the previous three months and unchanged from the third quarter of 2012. That compares with $17 million for Goldman Sachs and $13 million for JPMorgan. The bank "stayed very close to home in regards to risk," in trading, CEO Gorman said on the conference call. Morgan Stanley, typical of Wall Street banks, groups its commodities trading revenue under the fixed income, currency and commodities category in its quarterly earnings and does not break down the sector individually, often leaving VaR as one of its key risk-reward indicators for commodities. Goldman Sachs trimmed its VaR in the sector to $17 million from $19 million in the previous three months, while JPMorgan held its VaR unchanged at $13 million. ------2013------ ------2012------- --2011-- Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 * JPMorgan 13 13 15 14 13 13 21 20 15 * Goldman Sachs 17 19 21 20 22 20 26 26 25 * Morgan Stanley 20 24 20 22 22 27 27 28 32 * Bank of America n/a 14 15 15 12.5 11.9 13.1 12.1 15.7 * Citigroup n/a 12 34 13 15 18 14 18 21 Note: Bank of America and Citigroup report VaR data separately in later 10-Q filings with the Securities & Exchange Commission.