By Barani Krishnan April 18 (Reuters) - Morgan Stanley reported on Thursday that it had another difficult quarter in trading commodities due to "cyclical headwinds" in markets, even as revenues improved from the previous quarter. Morgan Stanley said its net revenue from trading commodities, currencies and bonds fell more than 40 percent in the quarter that ended in March from a year earlier, a much greater decline than that experienced by key Wall Street rivals such as Goldman Sachs and JPMorgan Chase. Wall Street banks typically do not break out their commodities revenue, listing them instead under the fixed income category that includes currencies and bonds. Goldman Sachs' first-quarter net revenue in fixed income fell 7 percent, and JPMorgan posted a drop of 5 percent. Morgan Stanley's commodity trading results in the fourth quarter of 2012 was its worst in 18 years, Chief Executive James Gorman said in January. On Thursday, the bank said its commodities results in the first quarter were relatively better than the previous three months. But year-on-year, it was still a weak quarter due to a tough market environment. "Commodities sales and trading revenues continue to be challenged by cyclical headwinds," Chief Financial Officer Ruth Porat said on a conference call on the results. She said net revenues in the fixed income category fell to $1.5 billion from $2.6 billion a year ago. The second quarter could be even tougher for Wall Street banks if the tumble in gold, oil and other commodity prices that unfolded in April marks the beginning of a period of marked uncertainty for markets, analysts said. London's Brent crude oil fell to a 9-month low below $100 a barrel earlier this week while gold posted record losses in dollar terms as the selloff accelerated on global economic worries. The 19-commodity Thomson Reuters-Jefferies CRB index is down more than 4 percent month-to-date compared with a slight sector gain in the first quarter. "Cyclical changes can take time to turn," Porat said. "It affects opportunities for us. It affects opportunities for clients related to particular structured solutions, which benefited us last year." SCALING BACK Wall Street banks have scaled back market exposures since the Dodd-Frank financial reform law passed in 2010 to limit excessive risk-taking by U.S. financial institutions. In their heyday, Morgan Stanley and Goldman ruled Wall Street's commodities business with a scale and expertise unmatched by their peers. The two ran physical commodity operations, such as oil pipelines and crude shipping, and also managed huge proprietary trading books that bet large sums of the banks' own money on energy, metals and agricultural derivatives. But their fortunes in commodities began dwindling after the financial crisis prompted U.S. regulators to crack down on risk-taking by banks. Since then, many Wall Street banks have dumped their proprietary trading desks, while trading and hedging only on clients' orders. U.S. investment banks such as Goldman Sachs and Morgan Stanley also face pressure from the Federal Reserve over their ownership of physical commodity assets after their conversion to financial holding companies in 2008. Morgan Stanley CEO Gorman hinted in October at a possible sale of the bank's multibillion-dollar oil trading arm that handles mostly energy and some metals trading. He said Morgan Stanley had an obligation to explore "different structures" for those units because of new U.S. regulations limiting their activities. His remarks came after months of chatter in banking circles that Morgan Stanley was in discussions with the oil-producing nation Qatar to sell at least a majority stake in its energy trading businesses. Along with Goldman, Morgan Stanley was one of the original "Wall Street refiners" that broke into the energy derivatives market three decades ago. 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. Oil trading is still estimated to make up about half its commodities business. Morgan Stanley also had a larger drop in its Value-At-Risk for commodities in the first quarter versus a year earlier, compared with Goldman and JPMorgan. VaR is an industry measure for the maximum risk a financial institution faces in a day for trading an asset class. Since Wall Street banks do not break down their commodities results, their VaR reading for commodities often serves as a risk-reward indicator in that area. Wall Street banks' average commodities VaR by quarter (millions of dollars per day): Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 2013 2012 2011 * JPMorgan 15 14 13 13 21 20 15 16 13 * Goldman Sachs 21 20 22 20 26 26 25 39 37 * Morgan Stanley 20 22 22 34 27 28 32 29 33 * Bank of America n/a n/a 12.5 11.9 13.1 12.1 15.7 23.7 23.9 ** Citigroup n/a n/a 15 18 14 18 21 25 23 * Value-at-Risk based on a 95 percent confidence level ** Value-at-Risk based on a 99 percent confidence level Note: Bank of America and Citigroup will report their VaR data separately in later 10-Q filings to the Securities & Exchange Commission.