Most 8086 instructions are implemented in microcode, but some are implemented in logic. The Group Decode ROM starts by categorizing instructions. The red rectangle detects 1-byte-logic instructions that don't use microcode. The yellow rectangle detects the HLT instruction.
The Bus Interface Unit has a lot of flip-flops to manage memory accesses. When a HALT comes in, it finishes any current memory access but new ones are stopped. In particular, the prefetch circuitry is blocked. A special mini-memory-cycle indicates the CPU is in the halt state.