Mark Allen replied with some of the background info on how bubbles (FD calls them Islands) work to my thread about floating point positional rounding errors possible as you get away from the origin of whatever 3D space is modelled. The rest is from my stint as a producer of Falcon4: Allied Force which uses very similar technologies (the engine for that title goes back to the early 90's).
So to put this into a soundbite: all players online at any given time are playing in the same universe (think EVE), but will be able to see and interact with only a limited # of players (32 or whatever) at any given time. The list of interactable players is not tied to systems, but changes dynamically as everyone moves around the galaxy, and may be altered by in-game mechanics, such as ignore and friends lists, and grouping.
Sound about right?
If above is right, it's probably better to avoid using the word instance, as it is generally used to mean an entirely different mechanic (eg. each system is one instance).