IT budgets at financial institutions have seen a significant increase, a report by market analyst Datamonitor has revealed.

Investment and securities firms are investing heavily in risk management systems, while fund managers are increasing IT spend on their payment systems, the research shows.

The Datamonitor report is based on a survey of 100 financial markets institutions in the U.K., U.S., Germany, France, Benelux countries and Switzerland, carried out in the fourth quarter of last year.

Amit Shah financial services technology analyst at Datamonitor and author of the study said: "Institutions have realized that technology investment is vital for long-term sustainability and maintaining competitive par."

Datamonitor also predicts a strong uptake of electronic trading in the near future. "At present only a handful of firms are fully utilizing the capabilities of electronic trading," Shah said. But new regulations such as the Markets in Financial Instruments Directive (Mifid) would drive a "strong uptake of electronic trading throughout 2007," he said.

A crackdown on phishing scams and initiatives against money laundering have emerged as key focus areas to satisfy regulatory requirements, Datamonitor found. "Regulators have become less tolerant and expect firms operating within their respective jurisdictions to have appropriate and adequate risk measures and controls in place.

"As such, 38% of all respondents in the study cite security measures as of paramount importance. This likely to continue well into 2007," the report says.