To me, I don't think the FMV should be taken so literally. If there is nothing below the torso, why would they make his hair sweep forward to cover his nether regions? I can see how it doesn't look like there's anything there period, but I'll just guess that this was Square hurrying things up, and deciding to not fully animate every part of Sephiroth's nekkid body when they can just "obscure" it in dark mako crystal, shadows and hair. The FMV's were groundbreaking at the time, yes, but not perfect. I think it was just a way to save time. Most wouldn't catch Sephiroth's appearent handicap unless studying the FMV frame by frame, which it was never intended to be.