The Australian Competition and Consumer Commission released its interim report into the Murray-Darling Basin Water Markets Inquiry on Thursday.

The commission found that the framework which governs the $1.5 billion market had been outgrown and change was needed for the market to operate efficiently at scale.

"Water trading has brought substantial benefits to water users across the Murray-Darling Basin, including by allowing irrigators to manage the amount of water they use , to earn income by selling excess water or their water rights, and to release capital to invest in their businesses," ACCC deputy chairman Mick Keogh said.

"However, these markets have significant problems. In basic terms, there is overly fragmented or complex regulation in some areas, not enough regulation in others, and a concerning lack of regulatory oversight and robust enforcement in important areas.

"This has led to a lack of trust in the markets among many water users and has undoubtedly reduced the benefits generated by those markets."

Mr Keogh said problems in the market increased distrust when the water is scarce or demand is increasing and can make a difficult situation worse.

Among the challenges highlighted by the competition watchdog are the various groups and agencies which oversee the Murray-Darling Basin, with roles and responsibilities overlapping.

"The Basin's water markets, and the bodies that oversee and interact with them, operate in a complex, fragmented and inconsistent system," Mr Keogh said.

"To make real and lasting improvements, we need to rethink how these water markets are governed."

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As well as highlighting the need for more transparency and to ensure integrity of the market, the ACCC said the trading rules don't always reflect the physical constraints of moving water, particularly around the southern basin.

"It is clear that the Basin's markets need decisive and comprehensive reform," Mr Keogh said.

"There are many problems, but we do not believe that dismantling existing water markets is the answer. This would mean farmers, communities and the Australian economy would miss out on the substantial benefits these markets provide."

The ACCC's interim report can be found here, and submissions are open until August 29, before a final report is produced for the government by November 30.