A peroxisomal location for insulin-degrading enzyme (IDE) has been defined by confocal immunofluorescence microscopy of stably transfected CHO cells overexpressing IDE and digitonin-permeabilization studies in normal nontransfected fibroblasts. The functional significance of IDE in degrading cleaved leader peptides of peroxisomal proteins targeted by the type II motif was evaluated with a synthetic peptide corresponding to the type II leader peptide of prethiolase. The peptide effectively competed for degradation and cross-linking of the high-affinity substrate 125I-labeled insulin to IDE. Direct proteolysis of the leader peptide of prethiolase was confirmed by HPLC; degradation was inhibited by immunodepletion with an antibody to IDE. Phylogenetic analysis of proteinases related to IDE revealed sequence similarity to mitochondrial processing peptidases.