WASHINGTON - The IRS' recently issued revisions to its arbitrage rules are mostly favorable for municipal derivatives, but contain proposed restrictions on interest rate caps that are troublesome, market participants said yesterday.

The so-called technical corrections, most of which the Internal Revenue Service issued on May 6 in proposed and temporary form, are "tremendously responsive" in addressing the Public Securities Association's concerns about the final arbitrage rules that were published last June, said Robert Sharp, a lawyer with Rogers & Wells in New York City.

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