Morgan Stanley will trim its commodities division by exiting areas such as trading of agricultural products, freight and some European power and gas following similar steps by other banks due to a poor outlook for revenue.
The move will lead to the departures of around 30 traders or just under a tenth of the workforce in the Wall Street bank's commodities division, one of the most powerful in the industry, a source familiar with the plan and a memorandum by the bank said.
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"The commodities revenue pool available to firms in our sector has fallen by almost 50 percent from the peak years of 2007-2009," the memorandum said.
"Much of this decrease is due to cyclical factors, and we firmly believe that the cycle will turn again in our favor in the future," it added.
A spokesman for the bank confirmed the memorandum was genuine.
Morgan Stanley's top rivals in commodities trading - Goldman Sachs, JP Morgan, Barclays and Deutsche Bank - have all seen traders depart in recent years to trading houses, which are rich in cash and more lightly regulated.
Banks also have had to drastically cut their proprietary trading in recent years and shift their focus towards servicing the needs of commodities clients, a business generally perceived as generating lower margins.
"The revenue pool has also been impacted by certain secular headwinds - such as increased regulatory compliance and capital costs as well as changes in the way in which clients interface markets," Morgan's memorandum said.
Morgan Stanley Chief Executive James Gorman said last year the bank was exploring "different structures" for the commodities unit because new regulations were limiting activities.
His comments followed months of speculation in the press that the bank could sell the unit, possibly to OPEC member Qatar.
Industry insiders have suggested the sale of the full unit may be challenging because of close links with other parts of the bank, which have made access to credit easy and provided a big competitive advantage.
The source familiar with the bank's plan said the latest changes would not have an impact on its energy trading and North American power and gas business, because the outlook for those markets was strong.
Morgan Stanley will beef up its North American fertilizer and shale gas-related products. It will exit trading in agricultural products, the physical dry freight business, and the Australian power business run from Singapore and reduce exposure to European power and gas trading by exiting some Eastern European markets, the memorandum said.
Earlier this year rival Barclays said it was halting agricultural trading with hedge funds, and Germany's Commerzbank also removed agricultural products from a commodity index fund.
A number of large banks have also reconsidered their activity in European power and gas as liquidity has fallen due to increased regulation. Deutsche Bank drastically reduced its London-based team last year.
Eastern Europe's power markets specifically were once seen as having great growth potential on the back of the EU's liberalisation rules.
But thin trading volumes and continued market dominance by state-owned companies have made it difficult for outsiders to enter the markets and generate profit. Experts say the region will remain a niche market for only a handful of players.
Morgan Stanley said in its first-quarter earnings call in April that commodity revenue had picked up from the fourth quarter, the bank's worst in commodities in 18 years.
In its memorandum this week, it said it has recently outperformed its peers by delivering revenue that "placed us in the top two", saying it would continue to adjust its model.
The memorandum made no mention of a possible sale of the commodities division, saying the ongoing changes "will help us refocus and capitalize on the new and existing opportunities for growth".