Australia's Murray-Darling Basin (MDB) is now well advanced on a major program of water reform to reduce threats to resource security, halt the ongoing decline in environmental conditions and improve the capacity to deal with climate change. Management of the MDB has been a focus for conflict between the Australian governments since federation in 1901. Within the region water is still managed with a high degree of autonomy by state governments but through implementation of the Water Act 2007 the Commonwealth (national) government is now asserting a basin-wide coordinating role for the first time. This paper places water management in the MDB within the larger context of the history of the evolution of the federal system in Australia and highlights a number of factors inherent in such systems that make it difficult to strengthen integration. It also suggests that the Commonwealth Environmental Water Holder, created by the Water Act, is emerging as a powerful new institutional force in the MDB even though this was not an intended consequence when the Act was designed.