Morgan Stanley's trading business improved more from increased client activity than asset value gains in the third quarter as clients returned after the fallout from the bank's bond-rating downgrade last summer, Chief Financial Officer Ruth Porat said on Thursday.

"Clients re-engaged and continued to re-engage throughout the quarter," Porat told Reuters in an interview.

The investment bank reported adjusted trading revenue of $3.6 billion for the third quarter, up 21 percent from a year earlier. That figure excludes a $2.3 billion accounting charge to reflect an increase in the value of the bank's own debt.

Morgan Stanley attributed the gains to better results in interest rate products and credit products, in its fixed-income trading business, which was most affected by Moody's decision to downgrade the bank's rating by two notches in July.

Although clients took a "wait-and-see" approach in June before Moody's announced its decision, hurting revenue in the second quarter, they came back to trade with the firm in the third quarter, Porat said.

Morgan Stanley is still targeting the same market share growth in its fixed income and commodities trading business, she said, even though it is exiting certain markets to move toward a simpler, more automated trading model.

Porat also explained a change in Morgan Stanley's value-at-risk model, saying the company is now using a formula that is weighted toward one-year market volatility rather than four-year volatility, a move that regulators approved.

Value-at-risk measures how much money a trading firm can lose on a single trading day. Morgan Stanley's value-at-risk last quarter was $63 million, down 36 percent from a year earlier under its new model. Its previous model showed value-at-risk of $82 million in the third quarter, down 37 percent.

Overall, Porat said she was pleased with Morgan Stanley's performance last quarter in both its trading and wealth management businesses, though there is still room for improvement. She expects the wealth management division to meet its goal of delivering pretax profit margin in the "mid-teens" range by the middle of next year.

"It's all going in the right direction and there's still some more to do," Porat said. (Reporting By Lauren Tara LaCapra; editing by John Wallace)