Peptide macrocycles are promising therapeutic molecules because they are protease resistant, structurally rigid, membrane permeable, and capable of modulating protein-protein interactions. Here, we report the characterization of the dual function macrocyclase-peptidase enzyme involved in the biosynthesis of the highly toxic amanitin toxin family of macrocycles. The enzyme first removes 10 residues from the N-terminus of a 35-residue substrate. Conformational trapping of the 25 amino-acid peptide forces the enzyme to release this intermediate rather than proceed to macrocyclization. The enzyme rebinds the 25 amino-acid peptide in a different conformation and catalyzes macrocyclization of the N-terminal eight residues. Structures of the enzyme bound to both substrates and biophysical analysis characterize the different binding modes rationalizing the mechanism. Using these insights simpler substrates with only five C-terminal residues were designed, allowing the enzyme to be more effectively exploited in biotechnology.