In November 2011, the European Union adopted the Short Selling Regulation, introducing a ban on naked sovereign credit default swaps (CDS), which was formally implemented in 2012. The Regulation permits only covered CDS positions for hedging purposes, a restriction that has been widely debated in both empirical and theoretical literature. We preliminarily argue that this regulation supports the prices of underlying securities during periods of market stress. We develop a general equilibrium model that captures the interactions among the CDS, security, and repo markets. The model distinguishes two types of hedging demand: (i) long exposures hedged by CDS, and (ii) credit exposures hedged by CDS. In both scenarios, restricting naked CDS raises collateral demand by short sellers, leading to lower repo rates and repo specialness that jointly affect the equilibrium security price. Overall, our results suggest that the naked CDS ban, while intended to stabilize the market, may amplify short-selling demand and collateral scarcity during market stress, thereby altering the transmission of credit risk to asset prices.