For an English-speaking American, not much. FreeTDS originated in the United States, and uses U.S. conventions if no locales.conf is present. The locales.conf provided with the installation also reflects these conventions.
locales.conf will probably be dropped from FreeTDS one day. Its only real purpose now is to control the format of date strings. The Right Way™ to deduce the appropriate default date format is from the application's locale settings, while allowing an override in freetds.conf. That's the direction we're headed.
If your purpose is to affect the client charset description, use freetds.conf instead.
Information on locales and locale strings is easily (even too easily!) found on the Internet, or see man locale for your system. FreeTDS will examine its environment for a LOCALE string. If it finds one, it will look it up in locales.conf to find your preferred settings. If it fails to find one, it will use its defaults.
Like freetds.conf, the location of locales.conf is determined by the value of --sysconfdir to configure. The default is PREFIX/etc.
This entry will be passed (almost) literally to strftime(3) to convert dates to strings.
For the most part, see you system documentation for strftime(3) (man 3 strftime). You will see there though that strftime(3) has no provision for milliseconds. The locales.conf format string uses %z for milliseconds.
If your system's strftime(3) does employ %z for its own use, it will not be given that chance by FreeTDS. FreeTDS will consume the %z for its milliseconds needs, and will not pass it on to strftime(3).
The language that will be used for error/status messages from the server. A SQL Server client can specify a language for such messages at login time.
FreeTDS issues a few messages of its own. Messages from the server are called "messages"; those from the client library (i.e., from FreeTDS) are called "error messages". FreeTDS-issued messages are not affected by locales.conf.
Indicates to the server what character set should be used for communicating with the client.