If you scroll through a backup, you'll see system data is stuff that you normally don't have access to, unless you're rooted - things like your WiFi connections and BT pairings, SMS, Call log, etc.
Wiping of /system wipes all of the associated files and data with the OS. Wiping of /data wipes all of the files with your data (apps, and such).
The backup (apps + system data) that TiBu makes is a one stop shop to restore either apps or data or both to your phone after wiping. The most accepted method for causing the least amount of problems is to make a full backup of all apps plus system data, then format all and install your new ROM, and then restore using Titanium Backup, excluding anything in red.
MY preferred way is to let all the apps reinstall themselves from the market, and then go back and install the missing ones manually, reboot, then restore all data (minus the red ones again) and reboot again.
HTH