Zinc metallopeptidases of the M1 family (M1 peptidases) with unique metal binding motif HEXXH(X)18E regulate many important biological processes such as tumor growth, angiogenesis, hormone regulation, and immune cell development. Typically, these enzymes exist in three-domain or four-domain format in which N-domain and catalytic domain are more conserved. The C-domain plays important roles in substrate binding and gating. In this study we report the first structure of a two-domain (N-domain and catalytic domain) M1 peptidase at 2.05 Å resolution. Despite the lack of C-domain, the enzyme is active and prefers peptide substrates with large hydrophobic N-terminal residues. Its substrate-bound structure was determined at 1.9 Å resolution. Structural analyses supported by site directed mutagenesis and molecular dynamics simulations reveal structural features that could compensate for the lack of C-domain. A unique loop insertion in the N-domain has important roles in gating and desolvation of active site. Three Arg residues of the catalytic domain are involved in substrate-binding roles typically played by positively charged residues of C-domain in other M1 peptidases. Further, its unique exopeptidase sequence motif, LALET, creates a more hydrophobic environment at the S1 subsite than the more common GXMEN motif in the family. This leads to high affinity for large hydrophobic residues in the S1 subsite, which contributes towards efficient substrate binding in absence of C-domain.