I've been sitting on this since this am. I have a very different opinion altogether. Let's remember that this is a LEGAL board (as we so often toss at people) not a "let's just show off how "open" or nonhomophobic we really are" board. Can he legally do anything about gramma? I'm not sure and I won't pretend that I do in this kind of situation. Let's remember that she is a LEGAL stranger and as such she has NO RIGHTS to tell the children anything that the parents don't want her to tell them.
Further, I'm not sure if OP is running around in public in a dress (other than Halloween) or if this is strictly a "bedroom" situation. I kinda read it at such that it may be a bedroom situation. Do any of you tell your children exactly what goes on in your bedroom? I don't. Any fetish that I may or may not have is NONE of my children's business. Let's use OP's example of S&M. There is no age appropriate level in where you tell your children that you enjoy that. It is up to every person to decide where their sexuality and fetishes lay and not one person on this board has the right to determine whether or not someone should tell their children about it. And before someone slaps me for it...I'm not talking about things that are illegal (such as pedophilia).
We recently had a thread on this board in which a stepmom told her stepson that sex "felt good". Many of us were disgusted with that. Why is this different? Because OP wears a dress? WHY do a 5 and 6 year old NEED to know that?
Should they know birds and bees, well, sure, dependent upon their age and maturity level. My son is 10 now and I should have a talk with him, however, I don't think that he's ready. But I don't want him taken advantage of by someone who is ready and does know. Today's society (with teen sex and "age appropriate" conversations and openness with your children) is FORCING me/and my son into a situation that I don't think he's ready for.
Quite frankly, I agree with OP and I resent that people think a 5 and 6 year old NEED to be told that their father has a fetish. I do like the suggestion that "Gramma is being silly" and changing the subject. None of you have the right to judge him for NOT wanting to tell his children.