Currently they initiate an ACPI shutdown event at the termination time. It's hard to initiate a shutdown in a more standardized manner. An instance shut down via this signal will generally see the init process begin gracefully stopping services, eventually halting on it's own. Typically your init process will get increasingly aggressive with kill signals, as defined by your service definitions, eventually getting to SIGKILL. If your init process fails to get the vcpu halted, after a (undocumented?) period AWS will halt the cpu(s) for you. This is about as graceful a shutdown as you're going to get with 'standard' interfaces.

Termination Notifications go out of their way to give you an extra heads up, in case your application is unlikely to gracefully handle being shut down by the init system. Think DB hosts with a craploads of dirty blocks that take a few minutes to sync to disk at shutdown.