Okay, I'm gonna offer what may be an uncomfortable, unconventional opinion. (What else is new, from me?)
My "baby" just turned two, so I've got a concept about what (at least some) two-year-olds are about. He's pretty non-verbal, like your nephew. His older brother, who is 3 1/2, didn't have many words at age two, either. And yes, "No!" is definitely a word that both of them know/knew.
If I were two years old and didn't get to spend much time with either of my parents, or even with one special caregiver, than I probably wouldn't listen to anyone, either. I mean, nobody's listening to HIS needs, are they? His needs for connecting intimately with his closest family members/protectors/loves?
I say this even though both my boys are in other rooms playing and one might say I'm not being an attentive mother because I've been on the computer for a couple of hours now without interacting much with either of them ... I know I'm often guilty of not listening to my boys, saying "uh-huh" and then not following through with what I just agreed to, "neglecting" them in small ways ... and one of the most effective ways they have of reminding me of that is by mirroring the effect to me: I ask or tell them something (I'm especially talking about my bigger boy, with verbal skills), and he ignores me. After awhile of this, I usually recognize that I've been ignoring him, too.
Melynn, I'm not talking about YOU ignoring him, I'm talking about his whole main structure of his life ignoring his basic needs.
As for some of your criticisms of your SIL (who lets him stack DVDs and knock them down) ... well, that's one of those "different strokes" things, I think. Just because she does things differently from you doesn't mean she's wrong, or you're wrong; you're both just handling things differently, which makes the transitions from household to household challenging for a little kid.
At two, he still believes he's the center of the Universe. And personally, I don't think this is a bad thing; God knows there'll be plenty enough of years ahead of him where he has to learn differently.
As for your nephew interacting with your new niece, and your sister (and I've got to admit, I got REALLY confused trying to trace whose kid was whose and who's related to who, how ... maybe initials would be helpful with such a complex story, please?) ... a two year old really doesn't have a clue that a baby can't eat things he can. Hell, he's probably not entirely clear yet about what HE can and can't eat, right? So I'm not willing to name his behavior toward his cousin (not his cousin? I'm confused again about relationships) as "Bad" behavior. I'm not saying it's safe to let him interact with her unsupervised, but I'm refraining from labeling his behavior as "bad" or "mean" or deserves punishment.
I'm not really big into punishment, as you may have gotten from other posts I've written. Granted, I'm not perfect, and have been known to punish my boys, especially the older one, but I don't believe that punishment is the best way to teach good behavior ... and certainly not for little, little kids (preverbal, being one way of delineating "little").
My sister, who's a nanny, disagrees with me, I think, although we've never talked about it directly. The last time my boys and I hung out with her and her granddaughters (who she was nanny-ing for), my older boy was in a bit of tantrum mode (not unknown but also not typical of him). For complicated reasons I won't go into here, I wasn't emotionally available to support him very well, so the tantrums just kept going. When I asked my sister what she thought I could do, her first remark was "he's playing you."
After I got a good night's sleep and got some care for myself (for the extraneous complicated reasons), I realized that my son was right, and was just communicating as loudly and as clearly as he knew how, and he was enormously frustrated by my not hearing him or affirming what was going on for him. Far from manipulating me or "playing me," he was doing his best to communicate clearly ... it's just that his skills are limited and more importantly, MY perception skills were blocked by my own circumstances.
Parenting is hard, hard HARD work. Taking care of someone ELSE's kids is even harder, especially when you love them and care about their lives. Kids' jobs are to (a) use play to learn about the world (i.e., what fun it is to throw eggs and see what happens!), and (b) push limits of their caregivers (because if they didn't, they'd stay in their diapers and lay around forever, wouldn't they? Ideal baby behavior is not ideal growing child or eventually independent adult behavior.)
Kids are sturdy, and smarter than we sometimes give them credit for. But that DOESN'T mean that they understand or buy into the rules that we all see as "natural" and "obvious." Not that the rules are wrong, either, but just that, essentially, kids are from another "culture" that doesn't automatically recognize our adult manners.
I'm talking in circles, and said children are working hard to get my attention again, so I'll stop here and give it to them.
I hope I haven't just muddied the waters entirely, but have given you another perspective to consider.