Oh my love. As others have said, I cannot even begin to think how I would process this, and while pregnant too. The only thing I can compare with it is, as a pregnant student, coming downstairs in the middle of the night to find my exDP snogging my (male) housemate. In hindsight I'm surprised how it didn't make me ill/affect the pregnancy, but I think Mother Nature is a clever, and protective old girl. I didn't make the right decisions then. Or, rather, I avoided making the decision I should have then. I think perhaps if I had confided in more/the right people I could have thought a bit straighter, but I panicked.
At the time, all those years ago, I don't think your DP did anything wrong. It was offered to him, he was drunk, and jumped at it. Obviously your DM betrayed your DF. But in addition she didn't exactly behave with dignity, but it sounds like she's not a very well lady, to be honest. And I think it would be dangerous to judge over all of that.
As others have said, I also understand the motives from both parties for wanting to keep it quiet. Right or wrong, it's what I would have done.
BUT, fastforward to now, I don't think I could ever get my head round being intimate with someone who'd been intimate with my mother. Regardless of the relationship with her (though I can see how the toxicity is getting all mixed up with this). I, personally, would just never be able to let go. God, it's hard enough as it is feeling sexy when you've got kids, and are busy and tired and...I could just see there being a significant lack of intimacy, which would provoke rows, and then whenever things are heated, or you've had a skinful, every single time this will be thrown back at your partner.
He's a wally for thinking you should be OK with this. Maybe he's boxing it off in his head, like he has done all thsi time, and is assuming you will too. Please do get away as soon as your DCs are safely with their Dad (but from what you've said, can you really relax when they're with him? he sounds unhinged too). Walk the moors. Sit in cafes miles away from home. Hurl stones in the sea.
But the main thing you need to do is talk, to help all the whirling thoughts in your head get themselves out there and as un-whirling as they can possibly be. Is there really no one in RL? Some trusted Aunt? A wise cousin?
If not, get thee to a really good psychologist/counsellor soon as. I think RELATE are great for everyday relationship stuff but this may be a bit beyond them. I'd be looking for someone good at handling trauma, because that's what this is. I'd also mention it all to your GP/midwife so they can be keeping an eye on you too.
And please believe this - this is the darkest hour. Things will never be as hard as this. Life will get lighter and clearer. You will survive. And you will have a beautiful baby. Whatever you decide, that much is true, and certain.