Faye Faye, your niece has decided to play Switzerland and act like a neutral party. She wants to pretend the holiday will be a greeting card moment, even though that is make-believe. This situation springs from a conflict which was not resolved to everyone's satisfaction. In addition, though her father was unfaithful, this daughter may take his side. If that is the case, you won't sway her.
Women are hard on other women.
That sounds hard, but think about it. Give your sister all the support you can, but understand there is no easy way to change your niece's decision. She wants to give orders about how the holiday will unfold, though she can't predetermine what will happen. If both parents are present, it may turn into a dogfight with tears, shouting, and accusations. The real issue is your sister's relationship with her ex-husband.