That's it really. My niece is this age and I have a 2 year old DS. They are now interacting and playing more together, which is great to see, but there is clearly a chasm between them in terms of understanding what's right and wrong and their playing can become ill tempered at times - all perfectly normal i'm sure! My sister is pretty good at trying to intervene (as am i when DS steps out of line), but i want to know what i can expect in terms of her behaviour with younger children. On the whole she's lovely and very caring with her little cousin. But she can also get bolshy and bossy, taking toys away from DS when he's playing with them (and leaving DS absolutely shaking with rage!), 'helping' unwrap his presents (in her words) but then actually taking over completely and pushing him away from his own toys because she wants to play with them. DS, for his part, says 'mine' very often at the moment to antagonise her (more often than not in the right context since they are his toys) and is becoming very adamant about his possession of things, which again is very normal but trying when they're both together. We've begun introducing the concept of sharing and taking turns which more often than not descends into chaos.
His birthday party is on Sunday (a family only affair) and they will both be together for several hours. I am finding it difficult knowing where to draw the line and when to step in if my sister doesn't (the classic 'you started it!' 'well you shouldn't retaliate/ you deserved it!' argument). I don't like chastising my niece when my sister is around to do it, but sometimes i feel it goes too far especially as i believe my niece's level of understanding is far superior to my DS's. I think i am expecting too much of both of them tbh and just need to front it out until they're a bit older!
try as you may, but 2 year old can not be expected to share - they do solitary play at this age and just don't get it!
3.5 year old is excited to see toys new to her, but she should understand to let little one play with his own toys but be allowed to play with some he doesn't care about so much. you could as k your sister to bring some of niece's toys, so she can have something to bargain with/swap or simply to play with
try to distract them with a story, songs, colouring or playdough.
most importantly you have to step in to protect DS from niece hurting him, worry not about your sister! youngest child needs most protection regardless of whose child they are - I'm sure your sister agrees!
I have a 3.5yr old DD and a younger not-quite 2 yr old. Everything you've said sounds pretty familiar (and normal!) although it is harder with cousins/non-siblings because there's different 'rules' even if both sets of parents are pretty much in agreement about parenting matters.
On specifics: my 3.5 yr old DD is pretty bossy too, and always wants the toy the younger one's playing with. She sometimes finds the transition hard nowadays from the strategies that worked with younger sibling to deal with i.e. she can't just 'swap' a different toy with the 'baby' and get her own way now, youngest has her own opinions on the matter and will not be distracted/fobbed off! It's probably harder still for your niece as she's (I presume) an only child at home so it's all harder to adjust to giving way to younger kid.
Taking turns is much more successful than 'sharing', in my experience.
You need to be ruthlessly fair about who gets what/for how long etc. sometimes regardless of 'whose' toy it is. I disagree with earlier poster, a 2 yr old can understand about taking turns, so persevere. My 2 yr old can be deliberately provocative and plays up role as 'youngest' sometimes to get own way!
However, 3.5 yr old should definitely understand that some toys/things are special and personal to younger child and not therefore up for bargaining. Presents are not theirs to open, and they must be stopped from 'helping' if necessary. Step in if their parent doesn't, don't be shy!
Distraction is king for 2 yr old, and over-the-top praise of bigger kid can also work wonders - thinking of 'special' jobs she can help with like choosing the plates to put on the table or 'helping' with some task can be good. And the more playing you can do with both of them together (rather than leaving them to get on with it by themselves) the better - my two love a bit of role play together but I often need to be involved as the storyteller/arbitrator to help smooth off some of the bossy edges of the 3.5 yr old and the non-cooperative (bloody-minded!) edges of the 2 yr old!
Btw, both my two adore their older cousin, who is 2 yrs older than DD1, so it will all pay off in time, I promise!