Yes, i can understand the logic of restricting class/size transmogrification. Rogues will make 2 huge swords, or some paladin will carry a 2h giant with one hand - such things aren't native and shouldn't be in game for sure.
Yet, there are no real problems if you are going to "downgrade" your weapon from a sword to dagger. Such possibility seems to me very demanded by Mages and Warlocks. Why? Because in game it is actually better to use 1h+offhand which makes staves transitional, and most good 1h weapons (including best) are swords. So for these classes there is no real weapon type choice.
As we all know casters are not using weapons to fight (they are casting spells), so it is just for looks. Big decorative sword on belt may look unrealistic with such way of fighting, it would just disturb. It seems logical to me if some mage will have a short weapon (dagger) for "extreme cases" and self-defence when magic didn't help. Yet it's hard to find a "small" sword versions, esspecially good looking ones, while 50+% of daggers are actually short swords.
Taking into account all the above i'm suggesting to allow (at least for casters) to transmogrificate 1handed swords into daggers.
I much prefer swords on my casters. A mage with a sword looks heroic, a mage with a dagger just looks like a homosexual cultist. Gandalf agrees.
You are going to have to restrict this to casters because otherwise it's gonna get weird with plate classes running around with daggers and at that point, I'm not sure it's worth bothering with.