I just wanted to offer a more simple explaination.
A) He has more than one sword. Cloud and every other person in the game cycles through different versions of their own weapons, why shouldn't Sephiroth?
B) If he has a sheath, it isnt based on a draw forward mechanic. Imagine it being more of a clam shell design. The sheath could be hinge in the middle with the side that falls down. Then it clicks closed. The force of drawing the weapon would be enough to free the door. But normal travel wouldnt unhinge it. Altough this is not in keeping with traditional ninja and samuri swords, it could work.
http://img.photobucket.com/albums/v3...ahan/sword.jpg