A Senate hearing Tuesday is expected to highlight a long-running, closed-door battle between regulators over the strength of the Volcker Rule.

Senate Banking Committee members are expected to ask their two witnesses — Gary Gensler, chairman of the Commodity Futures Trading Commission and Mary Schapiro, chairman of the Securities and Exchange Commission — about the headline-making trading losses at JPMorgan Chase, but the Volcker Rule's ban on proprietary trading is also likely to be a hot topic.

Of particular interest will be the comments of Gensler, whose agency has been pushing for a tougher implementation of the Volcker Rule than the banking regulators — particularly the Office of the Comptroller of the Currency — have been seeking. The JPMorgan losses are widely seen as strengthening the CFTC's side of the argument.

"I'm expecting Gensler to come out of the box fairly tough," said a Democratic Senate aide who asked not to be identified. "And I'm expecting Schapiro to hem and haw a little bit more and to not be comfortable laying down a firm view."

The still-unfolding revelations at JP Morgan are scrambling the internal dynamics between the five agencies that are responsible for implementing the Volcker Rule, said Donald Lamson, an attorney with Shearman & Sterling LLP who spent more than 30 years at the OCC.

While regulators had appeared to come to an agreement, the JPM losses have now reopened the issue, according to Lamson.

"Now all of a sudden someone has taken the playing board, disrupted it and moved all the pieces," he said.

For many months, the dispute between regulators has generally remained private, though it's believed to have been a factor in the CFTC's decision not to sign onto a draft rule released in October by the Federal Reserve Board, OCC, the Federal Deposit Insurance Corp., and the SEC.

The inability of the five agencies to see eye-to-eye is also thought by observers to have been a key reason why the draft proposal contained hundreds of questions for public comment. Each side of the dispute framed questions in a way that they hoped would bolster their side of the argument.

The split between the agencies was papered over in February when the CFTC released its own draft rule, which largely mimicked what the other agencies had proposed four months earlier.

But JP Morgan's trading loss, which has been growing since the bank's original $2 billion estimate, has reconfigured the situation.

Lamson said that he expects Tuesday's hearing will reveal previously private disagreements between agencies that are still reviewing industry comments on their proposal. He also said that the sunlight will make it more difficult to achieve a consensus between the agencies.

"Some are going to want to make things tougher," Lamson said. "Others are going to say: 'The comments were pretty bad, including from foreign governments, which we usually don't get. We need to back off a little bit.'"

In the last week, some glimpses of that divide have spilled into public view.

During a recent appearance on NBC's "Meet the Press," Democratic Sen. Carl Levin, who has been pushing for a tough implementation of the Volcker Rule, suggested that the banking regulators are to blame for what he sees as the laxity of the draft rules.

"Some of the regulators, we believe, including the ones who are regulating the trades, want to actually carry out the laws as written," Levin told NBC's David Gregory. "But some of the folks that regulate the banks and the Treasury are willing to weaken the law."

It makes sense that Levin, one of the principal authors of the Volcker Rule, is allied with the CFTC in this fight. The CFTC is responsible for ensuring the integrity of trading markets, a fundamentally different role than ensuring the safety and soundness of banks. On top of that, the CFTC's chief counsel, Dan Berkovitz, is a former aide to Levin.

One particular flashpoint in the bureaucratic fight involves whether to allow hedging against the risk associated with an entire portfolio as opposed to individual positions.

Levin argues that the draft proposal contains a loophole to allow portfolio hedging, so it was significant that last week a CFTC spokesman told Reuters that Gensler wants a final rule to bar portfolio hedging.

On the other side of the Volcker Rule debate has been the OCC, though observers are wondering whether Thomas Curry's recent confirmation as comptroller may soften the agency's stance.

At a briefing on the JP Morgan trades that regulators held with Senate staffers Friday, there was no evidence that the OCC is backing down in the fight.

OCC Chief Counsel Julie Williams argued at the briefing that the trades were a risk-reducing hedge that would be allowable under the Volcker Rule, though she did not provide information to support that view, according to a Democratic aide who was in attendance.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.