Chilton went on to say relying solely on compliance programs, documentation requirements and performance metrics is "simply not enough" and "The final Volcker Rule needs a robust, comprehensive and targeted definition of risk-mitigating activity in order to protect markets and consumers."
(Read more: JPMorgan quits physical commodities business)
The commissioner warned a clear definition of such activity is needed because even with the Volcker Rule "tightly written" banks would continue to "engage in, and likely expand, their ownership of commodities and trading activity in commodities. ... The conflict of interest here is obvious and, left unchecked, could easily 'muddy up' the regulatory oversight of banks, and make the complex myriad bank ownership portfolios an unregulatable endeavor."
Chilton tells CNBC the proposed rule he sent the chairman is a Volcker Rule deal breaker, "I won't vote for a final Volcker Rule unless this language, or something substantially similar, is included in the final text." At the present time there are four commissioners and it would take three to approve the Volcker Rule.
Monday morning Chilton will be addressing his vote decision and the "conflicts of interest" in bank activity in commodities at a meeting of Amcot, which is the trade association of America's cooperative cotton growers, in Lake Tahoe, Calif.
Chilton said, " Unless this language is written to avoid it, this could blow a huge hole in the Volcker Rule and would obfuscate the intent of Congress and President Obama when the financial reform legislation became law in 2010."
It is not the first time Chilton has addressed this issue with the chairman. In September 2012 he sent a letter to Bernanke regarding the implementation of the Volcker Rule and the need for clear cut guidelines and said he has not seen any movement on the issue which resulted in the second letter. Chilton also started calling for position limits before oil hit $150 in 2008. The position limits call was included in Dodd Frank in 2010.
Chilton added large investment banks may also be using this ownership of commodities, and the storage and delivery mechanisms to avoid certain regulations, like the Volcker Rule and speculative position limits.
"If the banks claim they have an actual interest in the physical commodity, they'll say they should be exempt from the ban on bank speculation." Chilton explained. "That's just another end run around rules. I don't know why banks can't just go back to being banks, making loans and helping to spur our economy."
Chilton tells CNBC that for weeks his office has been researching what kind of commodity assets the banks owned but it was extremely difficult, equating the search as a big black box.
"I'm a financial regulator; you'd think it would be a piece of pie to find a list of what they own, right?" Chilton asked. "After all, banks own commercial interests that can impact prices, and at the same time their trading desks are all over the very same markets. There are obvious conflicts of interest. I'm not saying there have been any violations of the law, but how would we even know?"
In Monday's speech, Chilton will reveal how the CFTC has found out Morgan Stanley has ownership stakes in oil tankers and a fuel distributor. "And, of course, they also trade crude oil and other energy contracts." he added.
Other CFTC research revealed, parts of Citigroup, Goldman Sachs and Bank of America own or have owed power plants. "They also trade energy contracts. And, everybody's been talking about Goldman Sachs holding on to aluminum at warehouses they own." explained Chilton.
"Some say that's consequently driving the up the price of beer and soda, while the bank collects storage fees. And, they trade aluminum. JPMorgan also owns similar warehouses, although they said last week they may get out of commodities. We'll see." he said. "Oh, and by the way, Barclays and JPMorgan are putting out hundreds of millions of dollars in restitution for getting caught rigging electricity prices."
Describing the data hunt in his speech as "sorta deja oohish" and reminiscent about the valuation of credit default swaps. Chilton warned that the fact even a regulator can't track down the information easily is "a big deal." "Tracking down this information should be an immediate responsibility of regulators." explained Chilton.
In his speech Chilton went on to say, "We need to find out specifically—and comprehensively—what banks own relating to physical commodities. Furthermore, the basic ownership information should be transparent. It should be listed on the Federal Reserve's website or someplace where people can view it."
According to Fed data, Goldman Sachs, JPMorgan Chase and Morgan Stanley held $35.2 billion in physical commodities at the end of last year.
(Read more: Goldman making changes in metals warehousing, availability)
Responding to Chilton's letter and speech, Securities Industry and Financial Markets Association spokesperson Liz Pierce said, "While we oppose the Volcker Rule generally, we don't have a comment on that specific issue."
The issue of bank ownership of commodities was the subject of hearings last week in the Senate. Sen. Sherrod Brown, D-Ohio, who chairs the Banking Subcommittee on Financial Institutions and Consumer Protection on the topic has also urged the Fed to provide greater guidance on the clarity of what commodity activities the banks should be allowed to do.
The Federal Reserve also announced last week it might reconsider its decade-old policy which has allowed investment banks to diversify and own certain unrelated businesses such as participation in the physical commodity markets.
Chilton said he hopes the Fed reverses this policy. "It (that policy) is flawed and if they don't, I hope Congress does so."
—By CNBC's Lori Ann LaRocco