... that system would be indistinguishable from the universe itself from the perspective of observers inside the simulation. Thus it would recreate the universe (albeit embedded in a parent universe).

I worry that there may be an instance of the Mind Projection Fallacy involved here. You are assuming there is a one-place predicate E(X) <=> {X has real existence}. But maybe the right way of thinking about it is as a two-place predicate J(A,X)<=> {Agent A judges that X has real existence}.

Example: In this formulation, Descartes's "cogito ergo sum" might best be expressed as leading to the conclusion J(me,me). Perhaps I can also become convinced of J(you,you) and perhaps even J(sim-being,sim_being). But getting from there to E(me) seems to be Mind Projection; getting to J(me, you) seems difficult; and getting to J(me, sim-being) seems very difficult. Especially if I can't also get to J(sim-being, me).